With interest rates so low, many mortgage holders are asking should use their savings to pay off their mortgage early or invest them. The emotional reaction is normally to get out of debt. You get the security of owning your own home; peace of mind knowing that if you lose your job or suffered an illness that prevented you from earning an income ever again that you won’t be in danger of losing your home and you have one less monthly outgoing to deal with. Mortgage repayments are for most their single biggest monthly outgoing. Without it they would have more money to spend or save and paying off the mortgage early could save thousands in interest payments.

Take a tracker mortgage at an average rate of 2% with 20 years remaining and you owe €200,000 – if you overpay it by €100 each month you will save €7,801 in interest payments to the bank. However, if you deposit the €100 into a regular savings account with an average rate of 4%, you would accumulate interest of €21,755. in that same time period. The €100 as an over-payment against the mortgage would take 3 years 4 months off the term but you are better off saving that money because you would earn nearly 3 times as much on deposit – provided that you can afford to make the monthly repayments.

Because you won’t see the savings until the mortgage is paid off, your savings must be discounted for inflation. A monthly repayment of €1,000 is saved 25 years into the future when your mortgage is redeemed. That amounts to a saving of only €562 in today’s terms if you factor in inflation at an average of 3%. You have to discount all future savings by inflation because the payments you avoid in the future will have depreciated in value.

If interest rates are less than the inflation rate, then you are literally being paid to borrow money in real terms even though you are paying interest each month – you make more by owing than by owning – strange but true.