Should I Use My Savings to Pay Off My Mortgage?
Comparing Returns: Savings Account vs Mortgage Repayment
One of the key considerations in deciding what to do with your savings is the return you'll get from different options. On the one hand, a savings account typically offers a modest interest rate. This is often lower than your mortgage interest rate, especially after tax. On the other hand, paying that same amount off your home loan delivers a guaranteed ‘return’ in the form of interest savings, usually at your mortgage rate. In most cases, your mortgage interest rate will be significantly higher than what a standard savings account can offer, even before considering any tax on the interest you earn from savings.
For example, if your mortgage is at 6% and your savings account earns 3%, paying the savings into the mortgage can save you twice as much in interest each year as you would earn in the bank. This can make a substantial difference to your long-term finances, reducing both the length of your mortgage and the total interest paid over the life of the loan.
Access to Funds: Flexibility Versus Financial Efficiency
It’s crucial to think about how quickly you might need to access your money. Once you’ve paid your savings into your mortgage that money isn’t as easily accessible for emergencies, unexpected expenses or future opportunities. If you need it back withdrawing funds usually requires refinancing or applying for a top-up, both of which can be time-consuming and may come with additional costs or lending criteria.
If maintaining some financial flexibility is important to you consider keeping a portion of your savings separate as an emergency fund (typically enough to cover a few months of essential expenses) while any surplus can go towards your mortgage. This approach helps you avoid falling back on high-interest debt like credit cards if the unexpected occurs.
Offset and Redraw Facilities: The Best of Both Worlds
Some mortgage products offer features such as offset accounts or redraw facilities which may allow you to combine the benefits of both approaches. An offset account is a transaction or savings account linked to your home loan. The balance in the offset account reduces the amount of the loan the bank charges interest on, so you save interest just like a lump sum repayment. The key advantage is that your savings remain fully accessible if you need to dip into them, providing flexibility without compromising the interest benefits.
A redraw facility may also be available, allowing you to make extra repayments with the ability to withdraw those extra funds in future. If you are comfortable keeping your spending in check using these tools can be an effective compromise.
Risk and Financial Security
Another factor to weigh is your personal risk tolerance. Using your savings to pay down your mortgage means more of your wealth is tied up in your home and out of reach for other uses. If you are concerned about job security, health issues or any situation where quick access to cash might be essential, keeping some funds on hand could give you greater peace of mind.
At the same time, reducing your mortgage puts you in a stronger position financially, potentially freeing up future income and protecting you from rising interest rates.
Match Your Decision to Your Goals
Think about what matters most for your current situation: is it maximising your financial efficiency or ensuring you are covered for every eventuality? For those with stable incomes and other safety nets in place, reducing your mortgage can be a very effective way to build wealth. For others (especially those facing uncertainty or likely expenses in the near future) keeping an accessible savings buffer may be the more prudent choice.
If you are disciplined with your finances and want to make your money work harder without sacrificing flexibility, exploring a mortgage with an offset or redraw facility could offer the best of both approaches.
Making Your Savings Work for You
Deciding what to do with your savings isn’t always straightforward, but thinking through your priorities and options will help you make a choice you feel confident about. By balancing the desire for financial efficiency with the need for flexibility, you can ensure your money brings you both security and progress toward your long-term goals. Whether you top up your mortgage, keep a savings buffer or take advantage of an offset account, making an informed decision puts you firmly in charge of your financial wellbeing.