What to do with your mortgage savings

At last, some good news for the millions of householders who’ve been finding it tough to make ends meet. Inflation is edging back down and further interest rate cuts are on the horizon. For many, financial pressures are finally easing.

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Those benefiting most are probably the four million or so people with tracker mortgages who will be significantly better off because of the recent interest rate reductions. Rates have fallen two percentage points since October and once this month’s rate cut of 1.5 points filters through to mortgage payments (for most borrowers this will be from December 1), households will really notice the difference.

Someone with a £150,000 25-year repayment mortgage will be paying £166 a month less than they were in September. So what should you be doing with this extra cash?

Yes, it’s boring, but don’t see it as an excuse to spend, spend, spend. You can be forgiven for perhaps spending a little more than you’d planned on Christmas, but then it’s time to get serious.

The lesson many households have learnt this year is living beyond your means is a risky strategy because it doesn’t take much to tip the apple cart. So don’t be tempted to slip back into old habits.

We look at some of the ‘sensible’ options.

Pay off other debts

If you’ve got debts on loans or credit cards, use the extra money to pay them down.

For example, if you owe £2,000 on a credit card are only repaying the minimum each month and are being charged interest at 16.9%, it would take you 15 years and 12 months to clear your debt. What’s more, over that time, you’ll pay an additional £1,484.87 in interest – nearly doubling the cost of your initial debt.

But, if you use the spare £166 you’ve got each month and increase your credit card repayments, your debt will be cleared in just 14 months, and you’ll have paid just £191.91 in interest.

Take it a step further and you can avoid paying any interest at all. To do this, you need to move the debt over onto a credit card that offers an interest-free period on balance transfers, such as the Virgin Credit Card, which has a 16-month interest-free period.

Visit our credit card channel for information on more 0% deals.

Start saving

One of the main reasons why so many people have struggled financially this year is because they’ve had no savings to fall back on. So if you’ve now got a bit of spare cash each month, it’s the perfect time to get into the savings habit and build up a financial buffer.

Individual savings accounts (Isa) are a great place to start as interest is paid tax-free. You can save up to £3,600 a year in a cash Isa. If you’re going to be saving monthly, First Direct’s Regular Saver Isa is a great deal – it pays a fixed rate of 7% for a year and you can invest up to £300 a month. However, this account is only available if you have a First Direct current account.

Alternatively, consider an easy access account. The leading deals are paying around 6%. These include Scottish Widows’ E-Cash Isa and NatWest’s Isa. However, bear in mind that these are variable rate products and most providers have yet to respond to this month’s interest rate reduction so the rates are likely to fall over the next few weeks.

If you’ve already used your Isa allowance, look at standard savings accounts. Again, regular savers are worth considering as they tend to pay higher rates of interest than easy access accounts and the rates are often fixed for a year which is particularly attractive in a falling interest rate environment.

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That said, regular saver accounts usually have quite strict conditions attached – you will probably have to pay money in every month during the one-year term in order to get the high rate, the amount normally has to be set at the beginning (minimums tend to be £25 per month up to a maximum of £250 or £300) so you can’t deposit varying amounts each month. Also, you probably won’t be able to access your money during the fixed period.

If you’ll be able to adhere to the conditions, leading deals include Barclays’ Monthly Savings Account, which is paying 7.75% and the Halifax Regular Saver at 7%.

You may decide that you want an account offering greater flexibility, in which case go for an easy access product. As with the variable rate Isas, the rates on many of the leading deals are likely to fall soon as providers announce their responses to the November rate cut. At the moment however, the leading rates are paying 6% or more. Alliance & Leicester’s eSaver Issue 2 is paying 6.30%, while ING Direct’s Savings Account, Britannia’s Direct Saver Reserve, Abbey’s eSaver Direct and A&L’s Online Tracker are all paying 6.0%.

Overpay on your mortgage

It may not be exciting, but if you keep your mortgage payments at the levels they were at prior to the October rate cut, therefore overpaying each month, you could save a huge amount of interest and slash your mortgage term.

Under the terms of many mortgage products, borrowers can overpay by up to 10% a year; some deals, notably lifetime trackers allow unlimited overpayments. If you plan to make overpayments check your terms and conditions first because you will be penalised if you pay back more than is permitted.

Last year Woolwich had a lifetime tracker at 0.18 points above Bank rate for the term of the mortgage. Borrowers who keep their repayments at the pre-October rate cut level, would reduce their mortgage term by eight and a half years and save themselves a staggering £16,433 in interest.

In the current environment of falling house prices, making overpayments on your mortgage can really make sense. With many homeowners struggling to remortgage because they don’t have much capital in their homes, overpaying is a great way of building up equity – not only will this give you access to a wider choice of mortgage deals, it will also give you greater protection against further house price falls and negative equity (this is where the outstanding mortgage is greater than the value of the property).

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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