Should I pay off my mortgage out of my savings?

Angela Murfitt
5 September 2016

Q

I am self-employed and own my home. I have enough money saved to pay off my mortgage. Should I clear it?

From
KD/Hereford

A

As you are self-employed, your income relies on your ability to remain in work and therefore it is important that you have an adequate emergency fund in place to cover your expenses in the event of a downturn in work, an accident or illness etc. An amount of six months’ outgoings is sensible.

This would give you the means of servicing your mortgage and meeting living expenses for a period of time should a catastrophe occur. 

If there is spare capital after taking this into account, then a few factors may dictate whether you should pay off your mortgage.

 

First, you need to confirm with your mortgage provider whether there is any penalty for early repayment. If there are penalties, then an alternative might be to overpay your mortgage by a little instead. Often, lenders allow you to overpay an amount without incurring a penalty and this could be a sensible option. 

From an investment point of view, in the current climate it is highly unlikely that you would be able to secure a risk-free net return on your capital, which matches, or even comes close to matching, the interest rate you will be paying your lender for borrowing your mortgage. So your debt will cost you more than you can earn on your savings.

Therefore, from a purely investment standpoint, it is understandable to want to repay the mortgage. 

However, holding cash gives you flexibility. Should something unforeseen crop up, you will have the ability to meet that cost and maintain your financial security. If you repay your mortgage and suddenly find you need to raise the capital again, your suitability for the mortgage will be reassessed and, depending on how your circumstances may have changed since you first took out a mortgage, you may find it may not be as easy to raise that capital as it once was.

Best instant-access savings rates

If you need a home for an emergency fund these are the best interest rates currently available on instant-access savings accounts.

Account type Provider Interest rate
Isa The Family Building Society 1.22% AER
Current account TSB 5% AER on balances up to £2,000
Savings account RCI Bank 1.2% AER

Source: Moneyfacts, 5 September 2016