Mortgage? Get rid of it!

SHOULD I pay off my mortgage? It's the question I'm hearing all the time-and it's a good one.

"Excuse me Martin. I've got some savings. Is is best to pay off my mortgage or leave it in a savings account?"

With the credit crunch turning home loan payments into a nightmare for many, for most people paying it off is the best possible safe thing to do. And even if you only pay off part, that can lead to a cut in the interest rate you pay. Let me explain . . .

The interest COST of borrowing is usually much higher than the interest EARNED on savings, so cancelling out debt with savings pays.

Imagine you have a £10,000 credit card debt at 18 per cent-the interest costs £1,800 a year. Yet you also have £10,000 in a top savings account earning £400 annually after tax. If you simply paid off the credit card with your savings, you're £1,400 a year better off.

Mortgages are simply a type of debt, although they tend to be cheaper.

When you SHOULD pay off your mortgage:

1 - IF IT costs more than savings earn. If your home loan rate is higher than the AFTER-TAX rate you earn on savings, the maths says you're better off overpaying than saving.

It's the after-tax bit that's crucial. A top-paying 6.5 per cent savings account sees a basic rate taxpayer lose 20 per cent in interest, leaving 5.2 per cent, while higher-rate taxpayers lose 40 per cent that's just 3.9 per cent.

To really see how overpaying a mortgage boosts your finances, think of it as a form of saving. Imagine you've £10,000 and use it to pay off some of your 6.5 per cent home loan. The result is £650 saved a year in interest.

To earn the same from savings, after tax, would require an account paying a stonking 8.1 per cent for basic-rate earners, or a ridiculously high 10.8 per cent for a higher-rate taxpayers.

Savings rates that high just don't exist for that amount of money, so repaying the mortgage is a winner. A few people who nabbed especially good mortgages may be better off carrying on saving their money. There's a special calculator at www. moneysavingexpert.com/payoffmortgage

2 - IF reducing the size of your mortgage cuts your interest rate. Thanks to the credit crunch, new mortgages are elusive if your loan is more than 90 per cent of your home's value. Even at 80 to 90 per cent, many low-cost deals are out of reach.

However, if you've cash, use a chunk to significantly reduce your borrowing and qualify for a better deal. So if you're close to getting a new deal, paying more off could help. For most, taken in isolation, overpaying is worth it, but as always there's a load of exceptions. . .

When you SHOULDN'T pay off your mortgage

1 - IF you have other more expensive debts. If you've credit cards or personal loans at higher interest rates than your mortgage, clear these first. The only exceptions are dirt-cheap debt such as official student loans, or 0 per cent credit cards.

2 - IF you have room in your cash ISA allowance. Every year each adult's allowed £3,600 TAX-FREE savings in a cash ISA ( www.moneysavingexpert.com/cashisas ). As there's no tax, for some people this will put more in your pocket than paying off your home loan. Of course, if you've filled it up, put any extra towards your mortgage.

3 - IF there are overpayment penalties. Some lenders, keen to make as much interest as possible, punish you for making overpayments. That'll almost certainly eat up any gains. But many now allow overpayments of up to 10 per cent a year.

4 - IF you don't have an emergency fund. Once you've overpaid, unlike savings, that money is gone for good. So ensure you've several months' worth of money set aside for an emergency. If you have nothing then suddenly suffer something like a burst boiler you could end up using an expensive credit card to pay for it.

The exception is if you've a flexible, offset or current account mortgage which allow you to overpay and borrow back.

In which case case stuff every penny in there!

* GMTV money guru Martin Lewis is the creator of the Consumer Revenge website MoneySavingExpert.com packed with info on how to get more money in your pocket.

PUT YOUR MONEYSAVING QUESTIONS TO MARTIN, EMAIL NOTW@MONEYSAVINGEXPERT.COM