Should we use a lump sum to clear our mortgage?
My husband and I have £51,000 left on our Nationwide repayment mortgage on a 2.5% interest rate. The mortgage is due to finish in 2020.
Following a pay-off from my husband's work we can afford to repay the mortgage in full. Is this the best thing we could do with the money?
We have no other outstanding debts, and we would still have about £120,000 left over to invest.
As the interest rate on your remaining mortgage is only 2.5%, you may think that paying this off won't provide you with the best return and that you should look at investing your money elsewhere.
However, paying an interest rate of 2.5% on a debt is equivalent to getting a return of 3.13% gross on a savings account for a basic-rate taxpayer, 4.17% gross for a higher-rate taxpayer and 5% gross for an additional-rate taxpayer.
It will be difficult to find savings accounts that produce a higher return than this, unless you lock your money away for a significant period of time.
It is possible to get tax-free returns from a savings account through a cash ISA. However, the annual cash ISA allowance of £5,640 for both you and your husband is considerably less than the amount you have to invest.
Also remember that only the first £85,000 you put into a bank account is protected by the Financial Services Compensation Scheme (FSCS) - unless it is a joint account where the guarantee doubles to £170,000.
The best long-term fixed-rate savings accounts
|FIRSTSAVE||Five-Year Fixed-Rate Bond (Issue 1)||3.05%||Operated online only. Minimum deposit £1,000|
|VANQUIS BANK||Five-Year High Yield Five-Year Bond||3.01%||Operated online. Minimum deposit £1,000|
|DARLINGTON BS||Monthly Income Bond 1||2.95%||Operated in branch or by post. Minimum deposit £10,000|
|SAINSBURY's BANK||Four-Year Fixed-Rate Saver||2.6%||Operated online or over the phone. Minimum deposit £5,000|
You should also remember that interest rates are at historic lows and are likely to rise in the future. If that happens, the interest you are paying on your mortgage is likely to rise much faster than the return on any savings accounts you may have.
You could try to achieve a better investment return by turning to the stockmarket, although this would involve more risk and the possibility that you might lose money, especially in the short term.
Therefore, if you are a relatively cautious investor, firstly check if there are any exit penalties for paying off your mortgage and, if there aren't, use this pay-off as an opportunity to become mortgage free.
is a certified financial planner at AWD Chase de Vere.