If you have savings that are the same amount of your morgage should you keep the savings or pay off the morgage?

[ssd]

unfortunately not my problem!! but someone at work

I don't think she pays tax as she hardly works, but she has been left money that is the same amount as her morgage(lucky her!!)

would you pay off all your motgage or keep the money in a high interest account?

personally I told her I'd pay off the morgage but she says then she'll have no savings....

so is no morgage better than no savings?

Pay of the mortgage - no question about it, she will save thousands in interest payments

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What Chequers said.

but what if she wants to move in the future, would she get another morgage for a small amount eg. £20-30k?

She should get an offset mortgage abd put most of the money into that. If you have a mortage of 100k and savings of 80k for instance, you will only pay interest on the balance of 20k.

You don't get interest on your savings, but as mortgage rates are higher than savings rates you're better off - and you don't pay tax on your savings either.

Paying off the mortgage is usually the best bet because interest being paid on the mortgage is generally higher than would be received on the savings (the same for offset mortgages) BUT in the current environment some banks are bending over backwards to pay high interest rates to savers (they need the money) so that might be worth investigating further. If not then I agree with furrycat that an offset mortgage would be best if she wants access to the money.

Interesting one. We've been diligently paying chunks off our mortgage, with a view to clearing it quickly, but dh said the other day that we should keep 6 months salary in savings as a priority in case of redundancy.

The idea of putting money into an offset mortgage sounds v. sensible, as you're reducing the interest, but can still draw down funds if you end up in trouble.

Whether she pays tax or not will need to be taken into account when calculating what to do.

There is a whole thing on that moneysavingexpert site about it here

I'm sure she doesn't pay tax, she only works part time term time, I think she's got some money from her family

maybe she should pay off some of her mortgage and keep some rainy day savings, thats a good idea

I faced this problem, paid off the mortgage and have been debt free for over five years and it's a fantastic feeling.

If you are building up capital in savings anyway, then you clearly can do so again.

Interest rates are shite at the mo, much better to ditch the debt and start again with new types of saving accounts

not a bad problem to have!

Furry cat is right, get an offset mortgage pay off most of the mortgage. Then if you really need to you can draw the money back if you need to. In the meantime use the money you are saving to put into an ISA or something. Best of both worlds.

Your friend needs to check if there are any early repayment charges on her mortgage if she does decide to pay some/all of it off.

Offset mortgages are a straightforward way of paying the money off and then being able to get at it if you want it. But you do usually pay for the flexibility with a slightly worse interest rate.

A lot of things to think about!

ssd, tell your friend to put the rainy day savings in a cash ISA (allowance is £3,600 per tax year). That way she does not pay income tax on the interest.

I would use a sizeable chunk to pay down the mortgage. But will also consider other tax efficient investments like share ISAs and pensions. Better not to have all your investment eggs in one (property) basket and to diversify.

I don't have an offset mortgage but a flexible one. I wonder whether it is just a question of semantics, but a flexible mortgage is basically a repayment mortgage which allows me the unlimited ability to overpay without incurring prepayment fees. And whatever amount I overpay, I can draw out again should I choose.

As far as I know, the interest rate on the flexible mortgage was very competitive at the time I took it out - and I consulted a mortgage broker at the time.

Pay mortgage!

To go and get another mortgage - an offset mortgage is going to cost money to set up - why pay out money to aquire another mortgage you don't actually need.

Plus offset mortgages have a few rules and regulation about how low the mortgage can go.

If the mortgage is small , the banks etc don't want to know they are just not interested in a mortgage for under at least £15 the setting up and everything is just not going to make them enough money. The bank will most probably suggest a loan at a higher rate of interest - not really worth paying interest either on a loan that you dont need and will cost you money.

agree, ivykat.

Ssd, this going out to get a mortgage should only apply after your friend's current fixed rate or discount period runs out. And always check the arrangement fees are not so high as to eat up all interest savings.

If she goes for an offset mortgage she also needs to consider how the FSA treats her savings should the bank do a Northern Rock. Only first 35k protected. Was going to type what happens but realise I've forgotten/am too tired to remember. However, I do remember reading that it wasn't completely clear.

what chequers said!