Reduce mortgage or save?

If you find yourself with extra income you may wonder which is the best option, make payments to your mortgage or save the money in an alternative savings plan.

Paying off your mortgage can save you significant interest payments. There is a snowball effect because the earlier you pay off the debt, the lower future interest payments will be. This table shows some of the savings that can be made through making extra mortgage payments.

• Making lumpsum payments to mortgage
• Making extra mortgage payments

If you wish to pay off your mortgage faster, it is important to get a flexible mortgage which enables extra payments to be made.

In some circumstances it may be better to save. This will generally be when you can get a saving interest rate higher than your mortgage payment. If your mortgage interest is 5.75% you will need to find a savings rate better than this. This will be quite difficult.

Tax on interest Received

If you are a higher income tax payer, don’t forget you can pay 40% of interest in tax. Therefore, if this is the case it is likely to be preferable to pay off your mortgage.

Reduce Mortgage or invest in stock Market?

Investing in the stock market is always something of a gamble. If you are not concerned about your mortgage and are able to absorb losses on the stock market, then it may be worth diversifying some of your savings into the stock market. If you would prefer a guaranteed reduction in your debt, it is better to reduce your mortgage and wait before paying it off.

Psychological effect.

Some people like the knowledge that they are reducing their debt. Others don’t worry about mortgage debt, but, prefer to have some savings in the bank. To be honest it doesn’t really matter, it depends on personal preference.

Current Account Mortgage

A good option which saves the dilemna of whether to reduce mortgage or save is to have a current account mortgage. This means that any savings you have in a current account are automatically used to offset your mortgage. A current account mortgage is much better than having savings gaining only 1-2% from a current account mortgage