‘Psst! Want an investment that pays up to 80 times as much as cash in some bank accounts but is absolutely safe and totally secure? And what about a 100 per cent guaranteed return that can be higher than financial watchdogs allow any investment company to use for forecasting future profits?’
Sounds like a snake-oil salesman scam, doesn’t it? But if your first reaction is, ‘You’ve got to be kidding’, then you’re wrong. Paying off mortgage loans with spare cash offers an unbeatable combination of high returns and super safety.
To see what we mean, take a look at the following mathematics. In this particular example, we’ve used interest-only figures for simplicity, although anyone with a repayment (capital and interest) loan will also make big gains. And, again for simplicity, we’ve assumed that the interest sums are calculated just one a year. That said, here’s the scenario:
Someone with a standard mortgage and with £100,000 outstanding at 6 per cent pays £60 a year, or £5 a month, in interest for each £1,000 borrowed. On the £100,000, that works out to £6,000 a year or £500 a month.
Now suppose that the homebuyer pays back £1,000. The new interest amount is £5,940 a year or £495 a month.
Compare the £60 a year saved with what the £1,000 would’ve earned in a bank or building society. The £1,000 could’ve earned as little as £1 at 0.10 per cent. And even at a much more generous 3 per cent, it would only make £30 – half the savings from mortgage repayment.
But you’ve forgotten income tax on the savings interest,’ you rightly say.
Ah, but the money you save by diverting cash to your mortgage account is tax-free. It must be grossed up (have the tax added back in) to give a fair contrast. Basic-rate taxpayers must earn the equivalent of 7.5 per cent from a normal investment to do as well. And top-rate taxpayers need a super-safe 10 per cent investment return from their cash to do as well.
After a payment is made, it reduces this year’s interest as well as that for every single year until the mortgage is redeemed. If interest rates go up, you’ll save even more. But if they fall, you’ll keep on saving and be able to afford to pay down your mortgage even more.
Some flexible or bank-account-linked mortgages let you borrow back overpayments so you can have your cake of lower payments with the knowledge that you can still eat it later if you need to. Alternatively, you can re-mortgage to a new home loan to raise money from your property if you need it.
