Using your mortgage as an emergency fund

I am a member of a few personal finance related online forums and I frequently see the question of “Where should I put my emergency savings?”

Without a doubt, the top answer always tends to be to keep it in the mortgage account, for those that have a mortgage.

Now the members of these communities mean well, but unlike financial advisers, there are no personal repercussions for bad advice, or advice given without explanation of the risks. People can give advice that is not relevant for the person asking, or does not properly detail the risks or limitations of the advice.

The answer to this question is not necessarily bad, but it is bad advice for some people and it is especially bad advice if the risks aren’t explained.

I think most of us understand that going to the internet for help with our problems should be approached with caution, but I worry for those of us that take this advice as gospel.

So what is wrong with using a mortgage account as an emergency fund account?

When people give this advice they will say things such as “It is a 5% return on your money. That can’t be beat in a savings account”. But they don’t actually mention anything about what happens when you need the money.

What happens when you have an emergency and actually need the money?

1/.You have to pay interest to get your money out.

Let’s say you have a revolving credit mortgage and are being charged a 5% interest rate. You don’t have an emergency fund but you want to start one now. You have decided you want $20,000, so you add $1,000 extra a month to this account for 20 months. After 20 months you have approximately $20,899. Interest returns of $899.

At month 21 your roof is damaged and needs immediate replacement. You immediately need your $20,899 back.

But the key point now is you are paying interest on the full amount of $20,899. When you were accumulating the emergency fund, it was only building up by $1,000 a month. You weren’t earning interest on $20,000 the whole time. Only for one month. Whereas, on the withdrawal, you have to pay interest on the full amount.

That is $1,045 in interest you will need to pay back.

A loss of $146 ($1,045 - $899).

Not only have you not earned any money on your emergency fund, but you have lost money.

2/. The variable interest rate can vary (not in your favour)

For example, the interest rate decreases to 4% and 4.5% during this 20 months for an average of 4.3%.

At the end of 20 months you have $20,770.

Less than the previous example because interest rates have gone down.

At month 21 your roof is damaged and needs immediate replacement. You immediately need your $21,000 back. But interest rates have just gone up to 5.5%

You are now withdrawing the money you put in at 4.3% returns and are instead paying the bank 5.5%.

You now owe $1,149 in interest. This is $379 more than you received. So a $379 loss.

You may not even have enough for your emergency now.

3/. Your money becomes under the bank control

More so than a savings account anyway. With mortgages, banks can easily change the rules and regulations so that you will no longer be able to withdraw your cash.

They can demand that it be kept on the mortgage and you can’t have it back.

Their mortgage. Their rules.

Where are you going to cover your emergency from now?

Let’s say you lose your job or have an illness and need your emergency funds. The bank finds out you have lost your job. Do you think they will give you your money back? Fat chance. You are now a high risk customer and they need to keep as much equity in the property as they can get.

An emergency fund should be easily accessible, and this is where having your emergency fund on the mortgage fails.

Final Thoughts

Having your emergency fund on your mortgage can work for some people under some circumstances. I just don’t want people thinking like it ALWAYS works and there are no downfalls. Because the risks aren’t explained by your online friends.

Having your emergency fund can be great on the mortgage if you never need the money back. The returns are better than savings accounts.

But what if you do need the money back? Will the bank allow you to have it back and what will the interest rate be?

The key to an emergency fund should be low risk of losses and easily accessible for when you need it. For those reasons, I think having your emergency fund on the mortgage is not the ideal.

If you have a high tolerance for risk, then it may be ok with you, chasing that extra 1 or 2% of returns in the hope that you will never have an emergency. If I were single and a bit younger I would probably employ this strategy myself.

But for me an emergency fund is not about chasing returns. That is what my investments are for. Now that I am older with a family, an emergency fund is about minimising losses and maximising accessibility. The last thing I want is an emergency is for my funds to be frozen or less than what I put in.

The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here