Should we use a lump sum to clear our mortgage?

11 October 2012

Q

My partner and I had to go for a higher-rate mortgage two years ago (our first mortgage) because my partner had an unresolved debt from five years ago, which he was unaware of. We paid the £3,000 debt in full immediately but because of that he was seen as "high risk". Two years on, we have met all payments on time and now have £8,000 in a savings account. With the mortgage coming up for renewal, we want to know if we would be better off paying a chunk of the mortgage with this £8,000?
From
MP/Romford

A

Paying off a mortgage is likely to give you a much better effective return on your cash than keeping it in a savings account, especially if your mortgage lender is charging a higher interest rate due to your previous credit history.
 
So in numbers terms, it's likely to be a good move. But there are other points to bear in mind before going ahead and making an overpayment on the mortgage.
 
First, there could be early repayment charges for overpayment, although the lender may allow partial overpayments without charging any penalty.These can be substantial and wipe out the benefit of reducing your mortgage.
 
Second, don't use all your savings to pay off the mortgage as you need a sum of cash easily accessible as a rainy day fund. Once you've paid it into your mortgage, you won't be able to access it in an emergency.
 
Finally, it would make sense for you to review your mortgage situation as it sounds like you've worked hard to get back on track since the credit blip. Building up a good track record will help you get back on to a mainstream mortgage deal at a lower rate. If you are free of any early repayment charges, it could be a good time to see if you can reduce your mortgage costs by switching to a better rate as well as reducing the balance.
 
 
[Video:1]