At times when savings rates are low, it is less attractive to put your money in a savings account. There are several alternatives that you can consider, such as paying off your mortgage. But what is the reason for low savings rates and what are the advantages and disadvantages of paying off your mortgage?
Save or redeem?
If you are going to pay off your mortgage, your mortgage debt will be lowered and you will often reduce the monthly costs. As a result, the mortgage lender misses interest income and you will have to pay a fine for this. You can often freely pay a certain amount of fine. This differs per mortgage lender and is in the conditions of your mortgage. Always be informed by an independent mortgage advisor in your area before you make a choice.
Benefits of repaying:
- When the mortgage interest rate is higher than the savings rate, it is wise to partially repay your mortgage with your savings. Here you will benefit more.
- The monthly payment decreases when you pay off and you are more owner of your home for a small part. This allows you to build up more capital.
- The risk of a residual debt with possible sale of your home will be lower.
- Are you going to retire and will you contribute part of your income? By paying off your monthly fixed costs will be lower and you will not suffer from this during your pension.
- Is your fixed-rate period declining and interest rising? This will have less impact if you have repaid a part because your debt is lower.
Disadvantages of paying off
- Less tax benefit
- Do you deduct more than the maximum fine-free amount? Then you have a chance of a fine from your mortgage lender.
- Your savings balance will be a lot lower after redemption. If you have to make an unexpected expense, you can not just use this money and you will have to take out a consumer loan with a much higher interest rate than your mortgage.
Let yourself be informed by an independent mortgage advisor
Before you make a choice between (partially) paying off your mortgage or putting your money into a savings account, you are wise to get your first advice. Consumind is happy to put you in touch with an independent mortgage advisor in your area to discuss the various options. Only then do you know for sure whether the choice you make is the right one for your situation.
Causes low savings rates
Low savings rates do not just happen. There are various causes for this, including the influence of the European Central Bank. The ECB can set the so-called ECB interest rate to zero percent in order to give economic growth a boost. This reduces the interest on loans, which stimulates the population to borrow more money and therefore spend more money. Normally, loans are financed with assets held with the banks on savings accounts. Due to the low ECB interest rate, banks can borrow money at a low interest rate. As a result, there is less demand for assets on savings accounts and therefore the savings interest automatically falls.
Another cause is the aging of the population. The group of people approaching their pensionable age is proportionately larger than the rest of the population. That large group of people now save for their pension and gives relatively less than the younger population. So there is a lot of capital available at banks and thus the savings interest decreases.