For almost four years now the Bank of England has set a record low base rate of 0.5% to prevent the rise of inflation in our continuingly poor economy. Those with large savings accounts will continue to be disappointed by their low interest rates, but it is good news for those still in debt.
The simple truth is that the cost of debt is normally much higher than the interest on savings. The exceptions are where there are penalties for clearing the debt or where the debt is exceptionally cheap for introductory purposes or other reasons.
Assuming you have various debts it's common sense that you should pay off the most expensive ones first. Use free finance software to see how much you pay for each debt per month. As mortgages are normally cheaper than credit cards or loans, you should focus on paying the latter off first. One exception, however, is official loans from the Student Loans Company where the interest rate is significantly lower than elsewhere.
Once these more expensive debts have been repaid, consider paying off your mortgage by diverting regular savings from elsewhere. In essence if your mortgage rate is higher than the net of tax savings rate you should look to start making additional payments towards your mortgage.
To illustrate this, if you had a £10,000 mortgage debt at 5%, your annual interest cost per annum would be £500. However, if you had savings of £10,000 receiving say 3% after tax you would be receiving £300 interest per annum. Diverting your £10,000 savings to repay part of your mortgage would save you £200 per annum.
However, before taking this course of action there are a couple of things to check first:
- Check with your lender if you have the option to increase your payments. Different mortgages from different lenders have different rules read the small print. There may be a cap on how much you can overpay, or how fast you are allowed to pay the mortgage off.
- Don't divert all of your savings. Keep some aside for unanticipated payments or emergencies.
If this all appears relevant to you, give it some serious consideration and it may provide you with a great solution if you are looking for ways to save money in this climate.