We’re raiding our savings at a record rate. New Bank of England figures show that £4.6 billion flooded out of banks and building societies in May. In the face of a looming remortgage headache, a chunk of this money is likely to have found its way into mortgage accounts, as people hurriedly pay down debts.
In May we paid off £0.1 billion of our mortgages – hot on the heels of repaying £1.5 billion in April. It’s an understandable reaction, but it’s worth considering the trade-offs you might be making.
This article isn't personal advice. If you're not sure if a course of action is right for you, ask for financial advice.
The HL savings and resilience tool and what we learned
It’s easy to see why people are so worried about remortgaging. The latest edition of our savings and resilience tool report found that borrowers are under huge pressure.
When a household spends 25% of its after-tax income on the mortgage, it’s considered at risk of falling behind on payments. Thanks to a horrible series of mortgage rate hikes, this time next year, over a quarter of mortgage holders are expected to be in this position.
Around 230,000 aren’t just at risk of falling behind, they also don’t have enough savings to cover more than three months’ of essential spending. This puts them at high risk.
Meanwhile, another 470,000 have unsustainable spending on top of everything else – putting them at critical risk of arrears. The number at critical risk is up 220,000 from when we ran the same figures back at the end of 2021.
Is overpaying a good idea?
If your remortgage is looming, you have cash to spare, you’re on top of expensive short-term borrowing, have emergency savings, and are saving and investing for the future, then overpaying the mortgage could be an option. You can usually top it up by up to 10% of the balance a year, within the terms of the deal.
However, if you’re paying high interest rates on expensive short-term debt, it normally makes more sense to pay this down. Even after the mortgage rate hikes, they’re nowhere near as expensive as credit cards and overdrafts.
Don’t jump without a safety net
Meanwhile, our savings and resilience tool shows that around one in three people don’t have enough savings for emergencies. Even among the highest fifth of earners, almost one in ten don’t have a big enough safety net.
If you don’t have emergency savings, you need to think very carefully before neglecting this in favour of paying down the mortgage.
Likewise, if you’re plundering your emergency savings to make extra mortgage payments, you need to be certain it’s the right thing for you. There’s real risk in leaving yourself vulnerable to unexpected financial shocks.
How to build an emergency savings pot
There are also long-term costs to consider, like if you were to decide to put overpaying the mortgage above things like making pension contributions. You could be paying a price for this decision long after the mortgage is paid.
The right choice will be different for everyone. For some people, paying down the mortgage is a sensible way to avoid a remortgage headache in the coming months. But for others, it will simply mean shifting pain to another part of your finances.