Should You Use Cash Savings To Pay Down Your Mortgage?

Sitting on a large pot of cash savings is quite an enviable position to be in these days, and if you’re pondering how best to utilise this liquidity then it’s only natural that your focus will turn first to paying off your biggest debt which, for many people, would be their mortgage.

But is it always the right choice to make? Here’s a list of the main benefits and disadvantages of using cash savings to pay down your mortgage.

Benefits

• Reduced interest payments. Paying down your mortgage will cut the amount of interest you’ll have to pay over the remaining term of the loan, saving you money in the long run. You can see exactly how much you could save by using our overpayment calculator.
• Paying your mortgage off sooner. Using a cash lump sum to pay off a large portion of your mortgage means you’ll be debt-free faster bringing you peace of mind and more financial freedom
• Increased equity. By reducing your mortgage balance, you’ll increase the amount of equity you have in your home. This will provide you with wider remortgage opportunities as and when your existing deal comes to an end due to a higher loan-to-value ratio
• Improve your credit score. Making regular, or even ad hoc, overpayments on your mortgage will help your credit score over time putting you in a stronger position for any future finance requirements
• Greater financial flexibility. Paying down your mortgage could reduce your repayments, leaving you with more disposable income for other important expenses or investment opportunities

Disadvantages

• Loss of liquidity. Once you use your cash savings to pay down your mortgage then that money is no longer available for other expenses or emergencies. This could leave you without a financial safety net
• Early repayment / overpayment penalties. Quite a few mortgage lenders will impose a penalty or fee if you either pay off all of your loan early or overpay above certain parameters whilst tied into a particular interest rate offer period. It’s important to check this before you proceed
• Higher opportunity cost. Paying down your mortgage may not be the best use of your cash savings, particularly if you have other debts, such as credit cards incurring higher interest payments, which could be paid off instead
• Missing out on other investments. Using all your cash savings to pay down your mortgage means you may have to miss out on other opportunities which could potentially yield a higher return
• Hindering retirement plans. Paying down your mortgage with cash savings could mean having to re-adjust your retirement plans and when you want to retire if you have insufficient funds in your pension.

What else could you do with the money?

Rather than using all of your cash savings to pay down your mortgage there are other options available to you which could also help. An offset mortgage, for example, allows you to hold a cash lump sum in a designated account, tied to your loan which has the dual effect of reducing the overall interest you would pay.

Also, if you’re concerned about your retirement planning, a cash lump sum into a pension would come with certain tax benefits and could, therefore, be more advantageous in the long run.

If you’re still unsure what decision to make, get in touch with us and we can introduce you to either a mortgage broker or pensions advisor who could explore all of these options with you in more detail, helping you reach a more informed choice.