To save or pay off mortgage: Which is the better option?

Not sure whether you should put your spare money in savings accounts or use it to pay off your mortgage? Then, this article may be for you.

09:55 22 May 2013

So, you have money sitting in the bank that doesn’t earn enough interest. And you are paying for a mortgage which you are being charged a much higher interest rate on. Now you’re probably thinking paying off your mortgage is wiser than saving your money.

In order for you to make well-informed decision, you need to understand the principle behind debt and savings. When you take out a loan, you borrow money from the bank and you’re being charged interest. Saving, on the other hand, means lending your money to the bank. In return it pays you interest.

However, there is a huge difference between the interest that you and the bank pays. The bank pays way less interest compared to the amount it will charge you. This is how they make profit.

In UK, if you have £1,000 credit card debt, you will normally have to pay £180 interest per month if the interest rate is 18per cent. If you have £1,000 savings, you’ll usually earn £20; this is 2per cent after tax.

 With this explanation in mind, figure out if your mortgage’s rate is higher when compared to the after-tax saving interest. If it is way too high, overpaying your mortgage will mean saving yourself a lot of money.