In the past six years, the Bank of England has presented home owners who have savings with a dilemma that it is difficult to resolve.
The slashing of the base interest rate to 0.5 percent has resulted in falling rates on mortgages, making borrowing to afford properties cheaper, but it has also seen the return on savings slump.
Therefore, a property owner with spare cash might be less concerned about paying extra on his already cheap home loan, but also might feel less than incentivised to pour cash into a savings account that offers a two percent AER.
This blog doesn’t pretend to have the answers to this particular conundrum and couldn’t give advice even if it did. Instead, in the next few paragraphs we will explore the various options of home owners and savers.
Paying off the mortgage faster.
By paying £10, £20, £50 or £100 extra off your mortgage every month you are speeding up the day that you finally are able to live mortgage free.
Being able to limit the amount of time you spend in hock to the bank will have the effect of cutting down on the overall interest payments you make.
It might seem like quite a sacrifice at the time, but the quicker the debt is repaid the less it will cost you in the long run.
If this is the case, then why doesn’t everyone pay off their mortgages early? Most of us are fixated on spending in the moment and enjoying money while we have it, instead of delaying gratification for the future.
If you are planning to pay off extra on your mortgage every year then you need to ensure it is a sustainable monthly commitment.
Don’t commit to overpaying more than you can afford, it might be easier to start off with a conservative sum that you know will be easy to stick to and gradually increase it as the months go by.
For some over payers the initial excitement and enthusiasm for excess payments wains as the months go by and ambitions slip. Therefore, in order for overpaying to be a serious, realistic strategy it must be maintained over the long term.
Adding to Savings
As mentioned above, the current financial climate is not one that suits savers. There are few incentives for prudent types who have spent years building up their nest egg.
The rates of return, whilst higher than the base rate set by the Bank of England are generally far lower than they were before 2008.
So why save at all?
There are still reasons to save, it is always important to have emergency funds tucked away, irrespective of interest rates.
Also your savings, if put in an ISA will enjoy protection from taxation and will accrue some interest every month.
The rate of interest is also unlikely to remain at a historic low either, meaning that in the next few years the returns on savings will inevitably improve.
The inevitable choice
As interest rates gradually increase, there will be an incentive both to save and to overpay on a mortgage.
Savings will be better rewarded with higher interest, but mortgage debt will be more expensive making it more important to repay it as quickly as possible.
Without a thorough audit of your circumstances and your financial strengths and weaknesses, it is difficult to know precisely which option to take, overpayment or saving.
This means that before you commit to either, it might be an idea to get some financial advice.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE