Are your savings rates as high as possible?
This isn't a question of whether repaying your mortgage beats your current savings. Instead, it must be 'does repaying my mortgage beat the highest paying savings available?'.
Many people are earning pitiful rates, and assume they can't improve them. Yet better deals are often available. So if you haven't already, check the Top Savings Accounts and Top Cash ISA guides for all the best rates.
You needn't switch to them right now, as overpaying your mortgage may win out. But at least know what's on offer, and compare against that to calculate the right option.
Would you face overpayment penalties?
Some lenders punish those who try to repay their mortgage quicker than agreed. This is especially common if you have a special offer fixed, tracker or discounted deal (see the free Remortgage Guide for details).
This is because lenders want you to stick with them once the cheap rate ends, as at that point their rates shoot up. This means it's not in their interest to let you repay the mortgage more quickly, because the longer it takes you to repay, the more they earn.
Thankfully, many allow you to overpay by up to 10% of the outstanding mortgage debt each year without penalties. But you must check with your lender, as any substantive extra costs are likely to outweigh the gains from overpaying the mortgage.
Do you have other debts, such as credit cards or loans?
A crucial rule of debt repayments is: clear the most expensive debts first. Do so and the interest doesn't build up as quickly, saving you cash and giving you more chance of clearing debts earlier. Therefore, as a rule of thumb...
Clear credit cards and loans before overpaying your mortgage, as they're usually more expensive.
Yet as with any rule of thumb, there are exceptions. Click all of the following that apply...
You're looking to get a remortgage deal
Having a smaller mortgage can mean you get a cheaper mortgage deal. The key metric for lenders is the LTV - the lower, the better.
Therefore if you've got a sizeable savings pot, by using it to reduce your mortgage borrowing and significantly cut your LTV, you may get access to cheaper rates.
Mathematically, this may be even more lucrative than paying off expensive loan and credit card debts, because getting your massive mortgage debt a little cheaper can outweigh continuing to pay a higher interest rate on a smaller debt.
However, psychologically, many people prefer to be 'debt-free', excluding their mortgage.
In truth, this is a pretty rare scenario, only likely if you are close to one of the key trigger LTV thresholds - where acceptability increases substantially and cost drops - or if you have massive savings. As a rough rule of thumb, the main thresholds are:
95% LTV: Above this, you won't be able to remortgage at all.
90%, 85%, 80%, 75% and 60% LTVs: Go below each of these and the top mortgage deals get cheaper.
If you're at these thresholds, you'll need to do some careful numbers. If the maths is close, it's better to clear cards and loans first.
You have outstanding student loans
This specifically refers to official loans from the Student Loans Company.
For students who started university or college in 2011 or before, interest is set at the lower of base rate plus one percentage point, or the rate of inflation (RPI), making it the cheapest possible long-term debt. It's possible, if inflation is high and interest rates are low, you may have a mortgage that's cheaper than the student loan but over the long term, that's unlikely.
Plus, unless you're earning over a set threshold (the exact amount depends on whether you started before or after 1998) you won't have to make monthly loan repayments anyway. Due to this, it's the one core type of loan you should overpay your mortgage ahead of.
For more information see Student Loans: Should I Pay them off?.
NB: Some students starting university in 2012 will pay interest above the rate of inflation, which could change this equation - see the Student Loans 2014 guide. As no one must start repaying that until April 2016, we haven't included it in this guide yet.
You are a 0% credit card tart
It's arguable that those who are financially savvy, with top credit scores, strict organisation and timekeeping who disloyally shift from 0% credit deal to 0% deal (see the best balance transfers guide) should also pay their mortgage off before their credit cards, as even with balance transfer fees that undercuts most mortgages.
This strategy should only really be adopted by the extremely financially competent (eg, stoozers) though. For anyone else, it's generally best to clear card debts first, even at a short term 0%.
You aren't allowed to overpay a loan
Many loans are structured repayments, which means you have a designated amount to repay each month, over a fixed term. While you are allowed to clear the debts in full (though there can be small repayment penalties for doing so), many older loans do not allow you to make monthly overpayments.
However, a change in rules came into place on 1 February 2011 which means you're able to make partial overpayments on loans taken out after this date. Banks may charge you for this, however they're only allowed to in certain circumstances, and the maximum charges is 1% of the amount repaid (if the loan is for over a year) or 0.5% (if under a year).
For anyone with loans from before Feb 2011, even though it's likely to be more expensive than your mortgage, if you don't have enough funds to clear the debt IN FULL you may want to use any savings towards your mortgage instead.
However if you are close to having enough to clear the loan, and will be able to get the whole amount together soon, it's likely to be worth waiting.
Do you have a sufficient emergency fund?
Good old-fashioned budgeting logic says it's always worthwhile having a cash emergency fund. While for people with expensive card and loan debts we generally disagree (see Use Savings To Repay Debts?), for those who are debt-free, apart from a mortgage, this is a good idea.
Overpay most mortgages and the cash is gone. So if the roof leaks or boiler bursts you may be forced to use expensive credit cards instead. Your earlier overpayments won't stop lenders charging you for being in arrears if you miss monthly repayments (see Mortgage Arrears Help).
So it's always a good idea to keep an emergency fund in savings - three to six months' worth of cash is a good guide, enough to live on if you lost your job or had other issues. If you're thinking of using newly arriving extra income (such as a pay rise) to overpay your mortgage, then build up an emergency fund first. As a minimum...
Put enough aside to cover mortgage repayments
for at least six months.
This applies even if the calculator shows you'd be better off overpaying your mortgage. It's what's known as 'a premium for liquidity'. In other words, it's sacrificing some interest for easy access to cash when needed.
The exception to this is for those with flexible or current account mortgages.
The exception - mortgages with flexible features
Mortgages with flexible features (including offset or current account mortgages) allow you to overpay and borrow back. So you can overpay the mortgage, then withdraw cash without penalties if you need it again. If you have one of these, there's no problem putting all spare cash in the mortgage - it can be used like a high-rate savings account.
Don't misread this as saying everyone should go for one of these mortgages. The problem is their interest rate is usually higher than standard mortgages, and for many the extra cost of the mortgage debt more than outweighs the gain on savings. See the Ultimate Mortgage Calculator to do a comparison for you plus see the Mortgage and Remortgage guides.
Can you cut the cost of your mortgage?
It's worth checking to see if your mortgage is over-expensive before making the decision.
If you can get a cheaper mortgage, it may change the result. Take a quick look at the Cheap Mortgages or Cheap Remortgages guides.
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