Is the mortgage market turbulence getting you down? Have you got a mortgage-related question you need answering? Email in and we’ll get one of our experts to reply. Nick Mendes, mortgage technical manager at John Charcol, has given his advice to a reader below. If you have a question for our experts, email us at money@inews.co.uk.
Question: I have been reading in the news that interest rates are going to stay higher for longer. I would like to know whether I should use my spare cash each month to save towards my children’s future or repay extra money off my mortgage as the interest rate is fixed until the end of this year and I am concerned my monthly mortgage cost will go up.
Answer: Many people are grappling with the question of what to do with spare cash as interest rates are expected to remain higher for longer. Should you use it to save for your children’s future, or overpay your mortgage to reduce future financial strain? Both options have their merits and drawbacks.
Overpaying your mortgage can offer several advantages, particularly in the current climate of higher interest rates. One key benefit is the reduction in the amount of interest you’ll pay over the term of the loan. By lowering your outstanding balance, you reduce the total interest charged, which can save you a substantial amount in the long run.
Another advantage is the potential to reduce your monthly payments when your fixed rate ends. With the prospect of a higher rate after the current deal expires, reducing your mortgage balance now can ease the financial burden later.
However, there are downsides to consider.
Overpaying your mortgage ties up your money, making it inaccessible for emergencies or other needs. You also need to check whether your lender imposes penalties for early repayments, as some fixed-rate mortgages limit how much you can overpay without incurring fees.
Finally, if your mortgage rate is relatively low, you might miss out on potentially higher returns by investing or saving your spare cash elsewhere.
Saving for your children’s future is a thoughtful and valuable goal, offering flexibility and the potential for significant financial growth. Options like Junior ISAs (JISAs) allow you to save or invest tax-free, giving your children a financial head start for future milestones such as university or buying their first home.
The earlier you start, the more time their money has to grow, particularly if you invest in stocks and shares, which historically offer better long-term returns than cash savings.
Another advantage is accessibility. Savings in an instant access account mean funds remain liquid, meaning you can access the money if unexpected expenses arise or if your children need it sooner than planned. This flexibility is especially important if you don’t have a substantial emergency fund already in place.
However, saving isn’t without risks. If you choose to invest rather than save in cash, you’re exposed to market volatility.
While long-term investments generally perform well, they’re not guaranteed, and your money could lose value in the short term. Even cash savings accounts, while stable, often offer returns that fail to keep up with inflation, potentially eroding the purchasing power of your money over time.
Deciding between saving and overpaying doesn’t have to be an all-or-nothing choice. Many people find success by splitting their spare cash between the two. This allows you to reduce your mortgage balance while still building a financial cushion for your children’s future. A balanced approach provides the benefits of both strategies, offering a blend of debt reduction and savings growth.
Before making any decisions, it’s crucial to ensure you have an emergency fund in place.
Aim to save three to six months’ worth of living expenses in an easy-access account. This fund will act as a financial safety net if unexpected costs arise, or your mortgage payments increase after your fixed term ends.
Key Considerations
When deciding how to allocate your spare cash, consider the following factors:
- Interest Rate Comparison: Compare your mortgage rate to the returns you could earn from saving or investing. If your mortgage rate is higher, overpaying is likely the better financial choice. If savings or investments offer higher returns, they might be the more attractive option.
- Flexibility: Overpayments reduce your debt but lock your money away. Savings, on the other hand, provide liquidity and can be accessed when needed.
- Long-Term Goals: Think about your priorities. Is reducing your financial commitments and securing your home more important, or are you focused on building a fund for your children’s future?
- Your Fixed-Rate End Date: With your current rate ending soon, it’s worth reviewing your options for remortgaging. Speak to a mortgage broker a few months before your deal expires to find a competitive rate and lock it in early if needed.
Both overpaying your mortgage and saving for your children’s future have clear benefits, but the right decision depends on your personal financial circumstances and goals.
If you’re still unsure, consider speaking to a financial adviser or mortgage broker who can help you assess your situation and make a tailored plan. Whichever option you choose, the fact that you’re being proactive about your finances means you’re already on the right track.
