Should I pay off my mortgage early?

15 November 2019

Q

I am getting towards the end of the three-year fixed-rate on my mortgage. I am currently paying 2.24% interest and pay £294.52 a month. The best new deal I have been offered is for two years at 1.89% (£287.58 a month).

I can’t decide whether to continue with the mortgage at the lower rate or whether to cash in some Premium Bonds to pay it all off plus a £400 early repayment fee. I have around £22,000 left to pay.

I hold £43,000 worth of Premium Bonds and usually win between £400 and £600 a year. By selling over half of them, it would lower my chances of winning and significantly reduce my savings.

I don’t have an Isa, but I do have two savings accounts with about £5,000 in each.  I can only afford to put about £100 a month into my pension, but without a mortgage I could increase this amount. 

What do you think I should do?

From
RH/Biggleswade

A

I think psychology plays a role here. If you have gone a long time without any cash prizes, the Premium Bonds may lose their attraction. The regular prizes you have been receiving represent a return of around 1.39% tax-free. Although it is less than your mortgage interest rate, it is still a decent return in the current low-interest rate environment. If you redeemed enough Bonds to pay off the mortgage, you would forever be wondering if one of those numbers might have won a major prize. Of course, you could go a whole year with no prizes, but I would say ‘fear of missing out’ may make them worth keeping.

Regarding the savings, you need to bear in mind the need to have a contingency fund in case of emergencies or unforeseen expenditure – normally up to six months’ net income is ideal. These two accounts seem to meet that need and therefore should be kept.  

Then there is the question of liquidity. While repaying the mortgage may free up some monthly income, it would reduce your capital substantially. If you needed money for other purposes, you would have less to fall back on; and the last thing you want is to have to borrow again. Also, could you be sure of being able to save the monthly amounts previously spent on the mortgage – or is it possible that some of it will be absorbed in normal spending?   

I am sure many might disagree, but I would be tempted to hold on to the savings and the Premium Bonds for now, providing, of course, that the mortgage payments remain affordable.

Francis Klonowski, director of Klonowski & Co

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