Q I have a relatively high mortgage payment of £1,400 a month. My five-year fixed-rate deal is ending in 2024 and I’m stressed about my next steps.
My mortgage will represent less than 50% of the value of the house at the next renewal, so presumably I’ll have access to the best rates.
In addition, I have roughly £40,000 in savings that I’m adding to each month.
Should I:
pay this money into my existing mortgage;
take it off the amount I borrow with my next mortgage
some combination of the above;
keep it in savings that will get the benefit of compounding over a longer time frame;
put it in a pension;
keep it for house renovations and perhaps an extension, though these are not a necessity?
The mortgage worries me and I want to pay it off as quickly as is feasible. However, I want to make the right financial choice and not lead a miserable life in the meantime.
JD
I have a joint mortgage and want to pay up early. What are the implications?Read more
A It’s hard to say without knowing about the rest of your financial situation. Is your £40,000 in savings surplus to requirements, or do you need all – or some – of it to cover financial emergencies? Do you need to have relatively speedy access to your cash? Because if you do, and you are under 55, putting your savings into a pension would mean that you couldn’t get your cash until after your 55th birthday.
If easy access isn’t a problem, then using some of your savings to start, or top up, your pension could well be a sensible choice because of the tax relief you get on pension contributions. You could, for example, redirect the money you add to your savings each month by adding it to a pension instead.
But back to your mortgage, and whether you should pay some of it off. If you are getting a better rate of interest on your savings than you are paying on your mortgage, it would seem to be a no-brainer that keeping your cash in savings makes more sense than paying off your mortgage.
However, Pete Mugleston, a mortgage expert at www.onlinemortgageadvisor.co.uk, says: “If the mortgage is a real stress and you want to relax the monthly pressure, then perhaps repaying a chunk of it is a good option, given you are at 50% loan to value (LTV), you’re right, the best deals are likely already available so it’s not likely to bring your rate down any significant amount.”
It is likely that you will face early redemption charges if you try to pay off more than 10% of your existing mortgage before the end of the fixed-rate period, so you would need to wait and make the payment when you organise the new deal.
“One middle-ground option may be to consider an offset mortgage,” says Mugleston. “They typically take your savings off the mortgage balance when they calculate your payments, without you having to part with the cash. However, these offset deals are less readily available and, as a result, aren’t always the cheapest rate of interest.”
To sum up, the right financial choice is the one that stops you stressing out and doesn’t make you miserable but only if you have a rainy day fund to fall back on.
