Kill Your Mortgage With A Bonus

By throwing a lump sum at your home loan each year, you can reduce shorten its life and reduce your interest bill.

What would you do if a windfall dropped into your lap? For example, if you received an inheritance, or won a prize. Or maybe you're one of the people who receive a bonus from work. Would you spend it, save it, or use it to shrink your mortgage?

On behalf of mortgage lender Birmingham Midshires, pollsters YouGov last month interviewed two thousand adults to find out what they did with their last annual bonus from work. This research reveals that most of us were sensible and used this lump sum to strengthen our finances, rather than embarking on a spending spree.

It's encouraging to see that more than half of the recipients of annual bonuses resisted the urge to splurge: 54% used this sum to save, invest or reduce their mortgage. In the past year, almost four in ten (39%) saved all or most of their annual bonus; one in sixteen (6%) ploughed it into investments; and one in eleven (9%) used it to lower mortgage debt.

On the other hand, some of us just can't resist rewarding ourselves with a few luxuries. One in eight bonus recipients (12%) treated themselves to a new holiday, and 11% splashed out on electrical luxuries such as iPods and plasma televisions. Ah, these folk must be those wretched Joneses that we're all so keen to keep up with!

Birmingham Midshires calculated that British workers collectively bagged over £24 billion in bonuses in the past year. This works out at almost £1,000 for each of the UK's 25 million homes. However, only three in ten of us (29%) got an annual bonus over the past year, which comes to almost fourteen million adults.

Among people who'd received a bonus in the past twelve months, the average payout was approximately £1,760, but there were strong regional variations. As you'd expect, Londoners topped the table with an average bonus of £2,770, while workers in the North of England got the lowest bonuses, averaging just £1,070.

If I were in line for an annual bonus (which, alas, I'm not!), then my goal would be to get the biggest bang for my buck, as follows:

• First, I'd use my windfall to pay down any expensive unsecured (non-mortgage) debts, such as credit and store cards, overdrafts, personal loans and so on.
• Second, I'd make sure that I piled up a large enough cash cushion to tide me over when times are hard -- say, six to twelve months' living expenses.
• Third, I'd make a lump-sum contribution to my mortgage, in order to reduce my housing debt.
• Fourth, if anything was left over, I'd invest it in shares, probably in a low-cost index-tracking fund.

If you don't have any unsecured debts and have a decent nest egg in cash, then throwing a lump sum at your mortgage every year is a great way to hammer your home loan. Furthermore, it's more tax efficient than putting money into taxable savings accounts. By overpaying in this way (make sure that there are no penalties before proceeding), you can bring forward your mortgage-free date by years, and subtract tens of thousands from your overall interest bill.

Finally, our mortgage calculator shows you how also making monthly overpayments can slash the length and cost of your home loan. Give it a try today!

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