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Money Saving Expert - column

Do you have a mortgage and savings? If so, it’s almost certain this is the moment to change strategy. Saving rates are dire are getting worse. So I want to urge you to urgently check now if you’d be far better off simply overpaying your mortgage instead – the gains can be in the £10,000s.

It’s now been several months since the Bank of England cut UK base rates from 0.5% to 0.25%. Since then we’ve gradually seen savings account after savings account slash its interest – for example NatWest's cash ISA's has dropped to 0.01% and Santander’s halving the interest on its 123 current account.

Of course, cutting the rate is meant to benefit those with mortgages, yet millions are locked in on fixed rates, or paying over the odds, so for many there's little gain. That's why I’m calling on everyone with a mortgage and spare cash to check if overpaying it is their best form of saving.

 Here are the six key need-to-knows: 

  1. The big question – is your mortgage rate higher than the rate on your savings? If it is then, quite simply you’ll be better off by overpaying it. It’s basic maths. For example, £1,000 saved at 1% earns £10/yr. Instead use this cash to reduce a 4% mortgage and your interest costs £40/yr less, so you're £30/yr better off. And the compounded impact of this over years is enormous. Use the mortgage overpay calculator at mse.me/mortgageoverpaycalc. However, if you're lucky enough to have a mortgage rate that's lower than your savings rate, don't overpay. Even though the calculator says you’ll gain, you’d gain more by saving.
  2. Beware overpayment penalties - Most mortgages allow you to overpay up to 10% of your balance annually – even if you’re on a fixed deal. That’s a decent whack, but above it there are penalties. If you’re on the lender’s standard variable rate, overpayments are usually unlimited. However, if there are penalties, this will usually kill the gain from overpaying.
  3. If you’ve other more expensive debts, pay them off first. While a mortgage is likely to be your biggest loan, it might not be your most expensive. If you have other debt at higher interest, use any spare cash to clear that first, as it is costing you more.
  4. Ensure you ask for the repayments to shorten the term. Don’t let them just lower your future mortgage repayments, this effectively spreads the debt and means you don’t get as much benefit. When you overpay, ask it to keep your repayments fixed, which will effectively shorten the term of your mortgage, even if you’re making regular rather than lump sum payments. However, please don’t read that as me saying “ask to shorten your term”. While cutting your mortgage term from 25 year to 20 years has the same effect as overpaying, you’re locked into it so can’t change back. By simply overpaying and letting that reduce the term gradually, you have flexibility to stop overpaying in future.
  5. Always have a readily available emergency fund. It’s important to have one of these just in case the worse happens. As even if you'd overpaid your mortgage, and, say you then lost your job, you could face mortgage arrears. So always keep an emergency cash fund to cover at least three and preferably six months of all bills. The only exception is for those with flexible mortgages allowing you to withdraw overpayments – as you could then do just that in the event of emergency. Having said that, there are a range of bank accounts that offer savers high rates, up to 5% or 6% but only on smaller amounts. Full best buys in mse.me/bestbankaccounts.
  6. If you can, get a cheaper mortgage elsewhere. If your mortgage rate is expensive, it’s always worth checking to see if you can get a cheaper one. Rates are at record lows at the moment – some are sub 1%, so see if you can switch and save. Like Kperat, who emailed "Fixed at 1.24% for 2 yrs, and reduced term to 13 years [effectively overpaying - ML] without paying more a month. Will be saving about £20,000 even after fees. THANKS.” Overpaying won’t only help you save now, but may also help you to get a cheaper mortgage rate in the future. As it reduces your mortgage debt, it decreases your ‘Loan To Value’ (LTV - the % of the price borrowed against the total house value) ratio. 

Don’t hate me . . . I dislike tinsel and Jingle Bells before December as much as the next man, but many festive savings are only possible if you do them early. 

I’m fed up of people telling me every January they’re skint, and when I ask why, they reply: “Christmas of course.” Well I can tell Shropshire Business readers exclusively here, Christmas will be on December 25 this year! 

A typical family Christmas in Shropshire costs between £600 and £800 – that’s a huge amount from one month's salary alone. If you’re saying you can’t afford that, and haven’t been putting money aside earlier in the year to spread the cost, then I’m afraid you’ll need to go cold turkey. 

Christmas is just one day; it’s not worth overspending and ruining your New Year. Here are some helpful festive finance tips: 

Agree to not give unnecessary presents.

Gifts for kids, grandchildren or your spouse are fine. Yet it’s time to stop the ever growing list of people we buy for even when we’ve no idea what they want. I’ve been campaigning to end unnecessary gifts for six years, and more and more people are doing it. Yet it involves agreeing a pact not to buy each other. Even the joy of giving can be selfish if it obligates someone who can’t afford it to buy back. Julia tweeted me a couple of weeks ago: "@MartinSLewis, finally took your advice and told family I can't afford Xmas presents. What a weight off my mind. Thank you."

So contact friends and family now and make an agreement not to buy, to cap the cost, only give homemade gifts, or even to give to charity instead. See my full ‘why Christmas presents are bad’ explanation at www.mse.me/BanChristmas. 

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Small savings make merry

If you buy a £2 coffee every work day, or other on-the-go refreshments, just give them up now, put the cash in a Christmas kitty instead and you’ll have some handy spending money by the big day. It’s about deciding priorities. If that’s cash you need for Christmas, are you willing to make the sacrifice?

 

Earn 5% cashback on your Christmas shopping.

If you’re going to be spending for Christmas, you might as well do it on a card that pays you every time you spend on it.

The no annual-fee www.americanexpress.com Platinum Everyday credit card pays you 5% cashback on your first three months' spending (maximum £100), so get it now and you get the big cashback during the high spend pre-Christmas period. It then follows with up to 1% after.

The cashback is paid after a year, so you’ll get it in time to help next Christmas, though there’s a minimum £3,000 spend to get it. That sounds a lot, but do all your normal spending on it as it pays you, and you’ll be fine. Of course, only do this if you’ve a direct debit to repay it IN FULL each month, or you’ll be charged 22.9% rep APR, which kills the gain.

Set up a Christmas cupboard.

Become a tactical shopper. Work out what necessary gifts you need to buy, and then if you spot a bargain, you can pounce on it when there’s a code, voucher or discount that makes it cheaper (I put the best in my weekly email at www.mse.me/tips). 

 Not used it since last Christmas? Flog it. 

Walk around the house and examine everything; it’s time for your annual personal stock clearance. Many old items can be worth serious cash. And if you’ve not used things for a year, whether toys, prams, old coffee makers, mobile phones, gadgets, or even clothes, why not sell them?

This isn’t just about eBay or car boot sales, Facebook now has a lot of good local sales groups too that can be an easy way to do this. There are also lots of recycling sites that will pay you for old mobiles and gadgets – just make sure you do your research first to find the one that’ll give you the most. 

 

http://www.njwealthplanning.co.uk
http://www.dykeyaxley.co.uk

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