IF you have spare cash, should you put it on deposit or pay off your mortgage?

It is a question that is asked many times and it sometimes generates different answers, but it is worth considering as we enter financially tighter times.

Whether it's a mortgage, car loan, credit card, or dental bills, you probably have some amount of debt in your life.

The wise thing to do with high-cost, lifestyle debt like credit card bills and car loans is to prioritise paying that off if you have spare money.

When it comes to mortgage debt, the interest rate is often much lower, making the choice between putting a lump sum on deposit and overpaying your mortgage more complicated.

But, according to respected personal finance commentator Brendan Burgess, the argument for paying down a lump sum on your mortgage or making monthly overpayments on your homeloan are strong.

The best rate you will get for a lump sum is 5.1pc (for one-year fixed accounts with either Irish Nationwide or Anglo Irish). You will be subject to 20pc tax on this, leaving a real rate of return of around 4pc.

Assuming your mortgage rate is 5pc then it will cost you to have money on deposit, even at a rate of 5.1pc. This cost works out at about 1pc -- the difference between your net return on your money on deposit (4pc) and the cost of the mortgage (5pc).

So, you are paying 1pc in interest for the privilege of having your money in the bank. (Remember, to get a rate of 5.1pc on deposit you will have to lock your money away for a year).

The alternative is to use your lump sum to lessen your mortgage. Put it this way: would you borrow money to put it on deposit? No you would not, so it makes sense to use spare money to pay off your mortgage.

Gains

It may be argued that there will be marginal gains to be made from paying into a high-interest savings account as opposed to overpaying a mortgage. But this has to be set against the peace of mind benefit of having a lower mortgage and more equity in your home.

There's also the risk that the savings account money will end up being blown on something besides repaying the mortgage.

When it comes to investing versus overpaying the mortgage, the argument comes down to ensuring you get an after-tax rate of return that is higher than the interest you are paying on your debt.

But that option is not without its risks, as the current market turmoil makes all too clear.