Should I use my savings to pay off my tracker mortgage?

9 December 2014

Q

I have fewer than three years and around £14,000 left on my tracker mortgage with Nationwide, which is part-repayment and currently has a rate of 2.99%. The payment is £34 a month but I am paying £290 to reduce the final lump sum. There is no early repayment charge. I have savings with Nationwide that are greater than the amount remaining on the mortgage. Should I pay off the mortgage?
From
MR/Cheshire

A

Your required monthly payment is only covering the interest on the mortgage not the capital. The good news is that you already have the funds available to pay off the remaining mortgage balance. In the meantime, you are committing a larger payment in order to reduce the capital as well.

Having the dilemma of whether to pay off the mortgage now or later is a nice problem to have and there are a couple of things that you should consider before going ahead.

Firstly, to come at this purely from a numbers point of view, you should consider whether the current return on the cash outweighs the cost of the mortgage interest. It sounds like the cash is being held in a savings account, so it's highly unlikely that the return will be in excess of the 2.99% interest rate on the mortgage, especially after taking any tax on savings into account.

To get a better rate of return on the cash, you would need to be earning a gross savings rate of 3.74% as a basic-rate taxpayer or 4.98% as a higher-rate taxpayer. That's not easily achievable in the current savings market.

The second issue is whether you might need access to the cash and whether you have additional funds that will still be available.

It will be harder to get at that cash once you have paid off the mortgage, so don't throw every spare penny at the mortgage if it would leave you without a rainy day fund.

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