07 December 2020 14:50
Q I am in the fortunate position of having managed to save a reasonable amount of money this summer and I have also got a new job with a decent pay rise. Would it be more sensible, given where interest rates are, for me to use my savings to overpay on my mortgage? I am two years into a five-year mortgage deal fixed at 2.1% and each year I am allowed to pay off 10% of the 27-year-term mortgage. I live in a two-bed flat in London without a garden, so currently it is likely that the flat's value may have dipped slightly, but I envisage being here for probably the next five years. A Yes, it does make sense to overpay your mortgage within the limits set by your lender.
Even though the fixed rate of interest you are paying is low, it is still more than double the interest you could earn on the most competitive savings accounts unless you are prepared to commit to regular saving. At NatWest and Royal Bank of Scotland, for example, your regular savings could earn you 3%. However, using your summer savings to overpay your mortgage may not be a good idea if you don't have other savings to fall back on in an emergency and/or you have other non-mortgage debts. As a general rule, you should aim to clear debts and then build up an emergency fund equal to six months' after-tax pay or even as much as a year's worth. If you decide that it would be a better idea to keep your savings for future financial emergencies, there may still be scope for overpaying your mortgage.
Instead of using your savings – and if your lender allows it – you could make regular overpayments using the extra money you are getting with your new job. If your lender only allows one lump-sum overpayment a year, the alternative would be to use your pay rise to build up more savings in a regular savings account. • Want expert help finding your new mortgage? Use our new online tool to search 1000s of deals from more than 80 lenders with the Guardian Mortgage Service, powered by L&C. When you're stuck at home all the time the opportunities to spend money are vastly reduced. As a result, many of us have been saving more this year. Prior to lockdown the average household saved just under 10% of their income, but this rocketed to 29.1% in the first lockdown, according to the Office for National Statistics. While many of us have more money in our savings accounts, the banks are not rewarding us. The record-low Bank of England base rate means that the average easy-access savings account pays just 0.23%, according to Moneyfacts. The best possible rate is a paltry 1.65% from AgriBank and you'd have to lock your money up for five years. So, what else could you do with your money? One idea could be to reduce your debts. In all probability the interest you are paying on your debt is higher than the interest you are earning on your savings. In which case, it may make sense to use your savings to reduce your debt. One key example of this is your mortgage.