Should I use savings to repay a loan?

Many home owning savers would definitely ask this question. Is it worth using Savings to repay a home loan?

The main reason for this is because while the money that you save in the bank earns meager rates, mortgage rates have not come down significantly. Many people are thus wondering if it is wise to pay their mortgages using the spare cash they have as savings. Of course it makes more economic sense to repay your debts before you can start saving. This discourse will offer you a guide to enable you decide if it is worth it.

Before you begin to decide if it is worth using your savings to repay a home loan, you need to establish a couple of important facts. First of all, you need to consider whether your savings rates are as high as possible. Rather than wondering if repaying the mortgage beats your savings, you should consider if repaying your mortgage beats the best paying savings that are currently available. Majority of people are earning meager rates on their saving, but this is because they lack information on better deals that are available in the market. You do not have to switch to these deals immediately because overpaying the mortgage may be more beneficial, but it is advisable to be aware of what the market has to offer and make comparisons against that to determine the best option.

The next thing to consider in determining if it is worth using your savings to repay a home loan is whether you would face any overpayment penalties. Some mortgage facilities will punish individuals who attempt to repay their home loans faster than previously agreed. This is particularly the case when the facility offers a fixed or discounted rate. Lenders will do this because they need you to stay with them even after the cheap rate expires and the rates rise again. Lenders usually do this because they are set to gain more if it takes you longer to repay the home loan. However, some lenders will allow up to 10% overpayments on an annual basis without applying penalties, but you need to confirm this with your home loan provider because any substantial additional costs may outweigh the benefits from paying using your savings.

The other thing that you should consider while attempting to establish whether it is worth using your savings to repay a home loan is if you can cut the cost of the home loan. Before making a decision, it is worthwhile to establish if your home loan is overpriced. If it is possible to access a cheaper home loan, then this may alter the results. Borrowing and saving has an intricate relationship in the sense that the bank lends you money and charges an interest, while the bank pays you interest for lending it money in the form of savings. Therefore, if the home loan rate is greater than the after tax savings interest, it makes more economic sense to use your savings to repay the home loan.

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