Should we make bigger repayments?
Q We’ve recently bought a two-bedroom flat and have a mortgage worth about 60% on it. Given all of the turmoil in the property market, particularly for flats, should we be putting any extra funds into paying more on the mortgage – and therefore maybe sinking good money after bad, although cutting the amount paid in interest – or should we just build up other savings? HC
If you are worried that the value of the flat has fallen to below the amount of the mortgage – that is you have negative equity in the flat – there might possibly be a case for paying off more of the mortgage. But more than 40% would have to be wiped off the value of your flat for negative equity to become an issue, and I find it hard to believe the value of your flat is about to fall by nearly half.
Also, negative equity only starts to be a real problem when you come to sell. This is because the sale proceeds from a property in negative equity aren’t enough to be able to pay off the mortgage, which is a problem if there is no spare cash from another source to make up the shortfall.
But even if negative equity isn’t a worry, paying off more of your mortgage could still be a sensible strategy. And you are right in saying that paying off more will reduce the total interest bill.
However, a lot depends on the state of the rest of your finances. If you have expensive unsecured debt, for example credit card borrowing, it would be better to pay that off. Similarly, if you don’t pay into a pension and/or haven’t made full use of your tax-free Isa allowance, any spare cash could be better used on these forms of long-term saving.
You also don’t say whether you live in the flat or if you let it to paying tenants. If it is the latter, the interest you pay on the mortgage can be offset against the rental income to reduce your tax bill. So, from a tax point of view, paying off more of your mortgage might not be such a good idea.
guardian.co.uk, Wednesday April 2 2008
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