Having savings can be a nice feeling. It can be good to know that you have some money to fall back on in case of an emergency and that you will be able to cope with any bills or problems that come your way. However, if you have a mortgage outstanding, then you may wonder whether it would work out better to pay some of the savings against that so that you can pay less in interest and potentially clear the debt more quickly. But whether this is a wise idea depends on a number of factors.
Firstly you will need to check the interest rates. How much mortgage rate are you paying and how much interest are you getting on your savings? You will need to take a look at the current rates or phone up to find out. Usually mortgage rates are higher than savings rates, but this will depend on the type of savings that you have. There are accounts, such as fixed rate bonds and notice savings accounts which will pay a high interest rate and there is a possibility that they may pay more than the mortgage interest. This will very much depend on your specific mortgage and what the Bank of England base rates are. It is worth checking to start with because if you are earning more on your savings then it makes sense to keep them where they are. However, if you are paying more on your mortgage then it could be worth using your savings to pay off some of the mortgage.
Before you think any further though you need to check the terms of your mortgage. Either look at the terms and conditions, which you should be able to find online if you do not have a copy or you can check with customer services. Find out whether there is a penalty, such as an early redemption fee, which may have an impact on the bonuses of paying back some or the entire mortgage. It is worth calculating how much money you will save in interest if you pay in your savings and compare that to how much you will make in interest if you leave them in the savings account. Of course the interest rates may change, but as it is impossible to predict the future, it is best to just compare at current rates.
If you have a flexible mortgage then it means that you will be able to draw the money back out of you need it. This is a great way to offset the mortgage and pay less interest but have access to the money that you have overpaid so that if there is an emergency you can get the money back out. In this situation, if it is cheaper for you to put the money against the mortgage, then it makes sense to do it. However, if the money is tied in once you pay it in and you cannot get it back out, then you may be more reluctant. You may worry about what you will do if you have an emergency and need money. It will all really depend on your personal situation and whether you think there will be likely to be an emergency and whether you think that you will be able to get the money form elsewhere. You may never have money emergencies, for example or you may have an overdraft or credit card to fall back on if absolutely necessary. You need to think about your current situation, your earnings and you access to credit to work out whether you think you should keep an emergency savings fund or whether you should pay savings off the mortgage. Also consider what a difference it will make. If you pay off a significant chunk of mortgage it may mean that you can repay less each month due to the reduction in interest payable or you could continue to pay off the same amount and pay the mortgage off more quickly. Each of these scenarios could make a significant difference to your future.
It is also worth remembering that if you have other types of debt, such as credit cards then the interest payable on these will be much higher than a mortgage. This means that it would make financial sense to pay these off rather than the mortgage.