Should I pay off my mortgage with savings?

14 February 2013

Q

I have two endowment policies to pay off my mortgage, but they are likely to have a shortfall. They are due to end in late 2016. My mortgage is also due to finish then, and I am meant to remortgage now as my fixed rate has just come to an end. However, I'm not sure whether to cash in the endowments and add some of my savings to pay it off now or to remortgage to interest-only. My mortgage is £30,000 and my endowments are worth £16,000.
From
SL/Aberdeen

A

The problem with this situation is that it's impossible to know exactly what you may get from the endowments at maturity versus what they will offer as a surrender value now.

It's always best for borrowers who do not know how they might deal with a shortfall to do something about it as soon as possible, perhaps switching some or all of the mortgage to a repayment basis to start reducing the capital balance.

As you have cash you can use to supplement the endowment proceeds you have a ready solution to any shortfall, so can choose your preferred strategy.

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If you remain hopeful that performance might improve, you could keep hold of the policies – although it's hard to point to anything that would support a turnaround in the outlook. If you see that as throwing good money after bad, surrendering the policies and paying the proceeds off the mortgage is the route to take.

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As to whether you use your savings to pay off the remainder of the mortgage now, you should consider the return you are receiving on deposit versus the interest you pay on the mortgage.

If the net return on the savings is lower than the mortgage rate, it makes sense to pay off the mortgage. However, it's always important to retain enough readily accessible cash to fall back on as 'rainy day' savings.