So, today I am going to bring you a short summary of whether it is better to put your money in savings, or whether it is better to pay off your mortgage. We all have the dream of paying off our mortgage early so that we can enjoy more disposable income.

 

At first glance it may seem like over paying your mortgage is the better option. You are reducing your long-term debt, the overpayments purely eat away at the capital part of mortgage so you are saving on interest, and you are closer to your goal of being mortgage free. The effect of paying off your mortgage is immediate; the money is paid and the debt is reduced. With savings it takes a long time to show any effect but over time it could be the better option.

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The crux of the argument is interest rates. If you can get a better net rate with your savings than the interest rate on your mortgage then you are better off by putting your money into savings than paying off your mortgage. Now, with cash savings this is very hard to do. Interest rates are very low right now, and while this is reflected in mortgage rates, they are still likely higher than you can obtain through cash deposits. 

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However, when you look at investing in stocks and shares there could be a good argument to put your money into savings, especially if you are young and have a long mortgage term left. As always with investing in stocks and shares, it is dependent on your personal circumstances and attitude to risk; the risk of stocks and shares being that the investment can fall in value as well as rise. 

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Let’s say for example your annual mortgage rate was 2% and you could achieve 3% growth on an investment in a year. If you were to invest £10,000 you would have £300 extra at the end of the year, if you were to use £10,000 to pay off your mortgage instead you would have saved £200 of interest. By putting your money into savings, you would be £100 better off. 

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The example above is very simple and there are other factors which come into play such as the tax wrapper the investment is in, the risk level of the investment, and particularly the length of time the investment will be in force. 

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I would love to be able to end this article by telling you which is the better option but as with most things in finance, it is dependent on each person’s circumstances. If you are considering putting your money into investments, which is one of our areas of expertise, we would be happy to help you so please get in touch.

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