PER­SONAL AC­COUNT

The Daily Telegraph - Your Money - - MONEY - Marc Sid­well

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

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