Got a pricey mortgage? It might give you a chance to beat low savings rates
If you want to look after your savings, you’re going to have to think laterally. Prices rose at a 2.7pc annual rate in August, and while that month saw the first real increase in Bank Rate since the financial crisis, it is still just 0.75pc, with many banks failing to pass on to savers even the puny 0.25 percentage point increase.
Right now, simply to beat inflation and not see your money lose spending power, you have to lock your funds away in a savings account for years – for example, the Seven Year Deposit account at PCF offers 2.75pc on £1,000-£250,000.
For those with long time horizons and a willingness to tolerate risk, prudent investment in funds and shares remains the best choice for worthwhile returns. But there’s another option as well, which in some circumstances can act as a proxy for the lack of high-interest savings accounts: pay off more of your mortgage.
Paying more into your mortgage can save you considerable sums, making it equivalent to achieving a better interest rate than savings accounts offer right now. And when the time comes to remortgage you will have shrunk the loan relative to the value of the house, potentially opening up better deals: useful when house price growth is slowing.
This option used to be even more compelling when mortgage rates were high, but it is still worth asking if it makes sense for you. It’s especially worthwhile if you’re stuck on an older, higher mortgage rate, or with a mortgage rate that is higher because you had a small deposit.
Let’s start with the downside. There’s an obvious way in which this isn’t the same as paying into a conventional savings account. When you put extra money into your mortgage, you’re not going to be able to pull it out again – although you will end up owning your property free and clear sooner. That inability to withdraw once you have committed means that before considering this tactic you should make sure you have access to rainy day funds for emergencies. Three to six months of salary is a good rule of thumb.
With a safety margin tucked away, the next thing to do is to consider if it makes sense for you. First, establish how much you expect to be able to afford to overpay each month. Second, consider any other debt you may have. Credit card debt or other borrowings with high interest rates should be a higher priority to pay off first.
Next, you must look at the terms of your mortgage. One of the most valuable things about overpayment is that it is often available on very flexible terms, meaning that you can adjust your overpayment to suit your circumstances. That said, some mortgages will have limits on the amount you can overpay without penalty. You may, for example, be limited to 10pc overpayment per year. Since incurring any penalties will wipe out the benefit of overpaying, make sure that you stay within your permitted limits.
The final test is to compare the best net interest rate you could get
Shrinking the size of your home loan could be a smart investment