Secret to beat low saving rate
whack of savings these don’t cut the mustard.
Instead there is a hidden savings option available for millions, and it comes in the shape of your mortgage. interest and many of these have gone up this week as lenders waited until December 1 to implement November’s UK base rate rise. As overpaying a 4% mortgage is like saving at 4%, that smacks the pants off any savings accounts.
Even if you’re not on the SVR, the golden rule is, if your mortgage rate is higher than top savings pay, then mathematically you’re better off aiming to clear it (unless you’ve other higher interest debts like credit cards – then clear those first). If it’s lower, then save instead.
When compounded, the gains from this can be enormous. If you dunked £5,000 of savings on to a 25-year £150,000 4.8% mortgage, you’d save over £10,000 in interest alone by the time the mortgage was clear.
Or shift savings of £250 a month to overpay that mortgage and you’d clear it nine years earlier, saving £40,000 in interest. To work out your personal saving you can use my mortgage overpay calculator at www.mse. me/mortgageoverpaycalc.
Many people are doing this like Tim, who tweeted “@ MartinSLewis We’ve overpaid £100 per month on the first two years of our mortgage and saved 12k in interest already!” Always have an emergency fund of three to six months’ worth of bills as even if you’ve overpaid a mortgage, if you lost your job you could face mortgage arrears. Most mortgages let you overpay up to 10% of your balance annually, but a few have overpayment penalties. So check that, because any penalties will almost certainly kibosh the gain.
If you do overpay, ensure the mortgage company uses it to shorten your term rather than reduce your monthly payment, or you won’t feel the gain.
And a final boon from this... overpaying may also help you get a cheaper future mortgage rate as it reduces your LTV (Loan To Value – how much of your house’s value you’re borrowing). For each 5% lower that is, down to 60%, mortgages tend to get cheaper. Martin says: Many people will have seen me on TV shouting pay off your card “IN FULL”. And your question is the reason why.
If you don’t pay your card off, you don’t just pay interest on the amount remaining, you pay it on the entire balance. To be clear, if you’ve £1,000 on the card and you clear all but £1, you pay interest on the whole £1,000, not just on the £1. This is why if you can nearly clear the card, do what you can to totally clear it.