Money-saving expert Martin Lewis, Consumer Journalist of the Year 2009, explains the pros and cons of paying off your mortgage ahead of other debts.
"SHOULD I pay off my mortgage if I have any spare cash?” is a question that’s always jammed my email bag. In previous years, overpaying has usually won out. Yet repeated slashing of UK interest rates has left many mortgages at unthinkably cheap rates. These cuts make it less attractive to repay a mortgage rather than save, as home loans are cheaper.
Deal with other debts first
For most people, it’s a question of overpaying their mortgage, and putting some of their spare cash and savings towards the mortgage, rather than clearing the whole lot in one go.
Yet the most important thing to understand is that your mortgage is a debt. It may have special features, but you have to think of it as a debt like any other.
So before tackling overpaying, it’s crucial to ask whether you have any other debts. That’s because you should always repay the most expensive debts first; mortgages are dirt cheap compared with most credit cards or loans, so prioritise clearing them.
There are three exceptions to this rule:
Struggling to get a new deal? Clearing your existing mortgage means you’re borrowing a lower proportion of your house’s value. If that puts you in a better loan to value (LTV) threshold, it could improve the rate you get on the whole of your mortgage.
Student loans beat mortgages>
Official Student Loans Company loans, which are usually set at the rate of inflation will, depending when you studied, drop to 0 per cent or minus 0.4 per cent (ie the loan shrinks) in September, so these easily undercut any mortgage.
Credit card tarts
If you’ve a good credit score, and consistently shift from one 0 per cent deal to another, then again you’ll be undercutting your mortgage so should pay that off first.
That said, from this point on I will assume you’ve no other debts, so have nothing to repay ahead of the mortgage.
It’s all about the mortgage rate.
Take a typical scenario of someone on a fixed-rate mortgage deal.
This means it won’t have changed since the base rate was cut to a historic low of 0.5 per cent.
If you have £10,000 of mortgage debt at five per cent interest, the annual cost to you is £500. If you have £10,000 of savings, earning you 2.5 per cent after tax, the interest you accumulate would be just £250.
So financial logic says that if you use £10,000 of savings to pay off £10,000 of mortgage debt, you would be £250 a year better off (a calculator to help work out if it’s worth it is at moneysavingexpert.com/ repaymortgage)
Therefore the crucial rule of thumb is “if your mortgage rate is higher than the after-tax rate on your savings, don’t save, pay off the mortgage”.
If it is lower, put your money in a top savings account (see money savingexpert.com/topsavings), because you’ll earn more from saving than the mortgage is costing you.
Then be ready if your mortgage rate jumps above the savings rate after tax, to use the cash to instantly pay off your mortgage.
Look before you leap in While the maths makes sense, there are some times practicalities mean it isn’t worth following.
1.Are you allowed to overpay?
Some mortgages charge penalties for overpayment, most commonly if you’re on a special offer, such as a fixed or capped rate. This is because lenders want you to stick with them once their cheap rate ends and then shoots up; it’s not in their interest to let you pay off the mortgage more quickly.
So check what the rules are: if there’s a penalty, how much is it? If there is you’re generally better off saving. Yet most deals allow you to make a certain level of repayment each year without penalty, perhaps up to ten per cent of your outstanding mortgage.
If that’s your situation, make the repayment up to the limit, then dump the rest in the highest paying savings account you can.
2.Keep a cash emergency fund
Once you’ve used cash to pay off a mortgage, the money has gone. You can’t access it (unless you’ve a special type of flexible mortgage), so you can’t easily borrow the money back.
So always keep cash aside for an emergency fund, preferably enough to meet six months worth of bills. Remember, just because you’ve overpaid, doesn’t mean, that if at a later date you can’t meet the mortgage repayments, the lender will be more forgiving.
You may also have your own reasons to keep more. Ultimately, always ensure you won’t need to borrow the money back at a high rate from elsewhere.
If both those are sorted, and the financial logic fits, it’s worth shoving your extra cash into overpayments.
Not only will you be saving year on year, but because you owe less, your interest won’t be compounding, and you will pay off your mortgage at a much more accelerated rate.
Beauty basics for £1.50
BARGAIN beauty website eyeslipsface.co.uk sells make up for just £1.50 a piece. The site, which has great feedback from MoneySavers, has lipsticks, glosses, foundations, bronzers and even eyelash curlers – all for £1.50.
Standard delivery is £2.95.
A complete school uniform for £3.95
TESCO is selling a complete Value brand school uniform, for age ranges three to 16, at just £3.75. Polo shirts cost 50p, trousers and skirts £1.50 and sweatshirts £1.75.
The Value range can only be found in 200 of Tesco’s 750 stores, so if you’re making a special trip, call your nearest store first.
■ TV money guru Martin Lewis runs the consumer revenge website MoneySavingExpert.com; ensure you get his weekly e-mail so you’re constantly saving money.
Dee does it her way LIFE as a single parent is never easy, but that hasn’t stopped young Darlington mum Dee Hobden knuckling down to some serious study and opening her own business in times where this could be more than a risky venture.
Dee, who is 28 and has a sevenyear- old son, has just opened Beauty Below at Jaze hair salon in Victoria Road, Darlington, after four years studying beauty therapy at NVQ level 3 at Darlington College. On top of that she has also just completed her teacher training for further education for post-16s.
Dee says she’s always enjoyed doing her friends’ make-up and nails and decided that she would train to do it properly and make a career of it.
“I’m a single parent and I did it all on my own. I’ve put myself through college and even though it was hard, it was worth it,” she says. “I get a lot of satisfaction out of knowing I have made my clients feel and look better.
It’s my reward.”
Before she set up on her own in April, with a lot of help from Jaze salon owner and family friend Lynne Horner, Dee worked at two other salons but felt she could achieve more if she worked for herself. And so far she seems to have been right, as things a going rather well and Jaze clients have jumped at the chance to have some pampering treatments done at the same time as their hair.
As well as the usual beauty treatments, such as waxing, spray tans, facials, eyebrow and lash treatments and manicure and pedicures, Dee also does bridal make-up and is qualified to administer Environ facials and skincare assessments, something she is particularly proud of as the brand is exclusive and not available over the counter.
■ Beauty Below by Dee Hobden at Jaze salon, Victoria Road, Darlington, opposite entrance to Sainsbury’s car park, 07854-721059 or 01325-356969 GIVEAWAY Beauty Below and the Northern Echo have teamed up to give one lucky reader the chance to win a luxury Environ Anti-Ageing facial worth £40. To be in with a chance of winning, all you have to do is answer this question. Where did Dee train to become a beauty therapist? Send your answer to Beauty Below competition, The Northern Echo, Features, Priestgate, Darlington, DL1 1NF.
Closing date is Friday, July 3. Usual Newsquest competition rules apply.
BUY-ONE-GET-ONE-FREE The first 30 people to ring Beauty Below to book a Fake Bake spray tan will receive a second for free. A full body spray tan costs £20. Mention The Northern Echo at the time of booking.