Where to put your savings

Savers with Santander’s popular 123 current account are counting the cost of the decision by the Bank of England’s Monetary Policy Committee to cut interest rates to a new record low last week. The bank has responded by slashing the 3% interest that it previously paid on cash balances in the account to 1.5%.

High-interest current accounts such as Santander’s 123 have become increasingly popular with savers fed up with the paltry rates of interest from conventional savings accounts. While the best easy-access savings accounts currently pay just 1.2% interest a year, the top current accounts have been offering as much as 5% assuming you meet their terms and conditions, albeit up to limited maximum balances.

Santander’s rate cut may be followed by similar reductions from its rivals, so it will be important to keep an eye on what you’re earning over the coming months. For now, however, the most generous rates on current accounts are Nationwide’s FlexDirect and the TSB Classic Plus. Both offer 5% annual interest on balances of up to £2,500 and £2,000 respectively.

Savers with larger sums have the most to lose from Santander’s rate cut, since the 123 Account pays interest on balances of up to £20,000. The nearest equivalent is Lloyds’ offer of 4% on balances of between £4,000 and £5,000 – but anyone with more than £13,333 to deposit will still be better off with Santander if they want to keep the whole amount in a single account.

It’s important to read the small print of these high-interest current accounts carefully. You’ll typically be required to pay in a certain amount each month – £500 or £1,000 is typical – to earn interest; in some cases account fees may apply if you don’t pay in enough. And with certain accounts the headline rates of interest are short-term offers. Nationwide only pays 5% for a year, for example.

Nevertheless, these accounts can be an excellent way to beat rock-bottom rates on traditional savings products. You can open accounts with as many banks as you like, assuming you can meet the monthly deposit conditions, and may even be able to open both a single and a joint account at the same bank in order to double up your maximum balance.

Overpay your mortgage

The latest rate cut means that millions of mortgage borrowers will see their monthly payments fall as variable mortgage rates come down. But opting not to spend the spare cash could make for larger long-term savings.

On a £200,000 repayment mortgage, a 0.25 percentage point reduction means a monthly saving of £24.16. But you don’t have to pay the lower amount; most mortgages allow you to make overpayments – additional repayments made on a regular or one-off basis. By instructing your mortgage lender to carry on taking what you’ve got used to paying each month, rather than giving you the benefit of its lower rates, that’s what you’ll be doing.

The results can be spectacular. Assuming, for example, that your £200,000 repayment mortgage is currently priced at 4%, turning down the mortgage rate reduction and overpaying by £24 each month will save you £4,955 in interest charges over the term of a 25-year loan. And you’ll be mortgage-free 11 months earlier than expected.

Overpaying even small amounts on a regular basis produces impressive savings because almost all mortgage lenders now calculate interest on a daily basis, according to the amount of debt outstanding. Each overpayment reduces the amount of capital on which you’re paying interest, so the effect is multiplied over time.

Check the terms of your mortgage to make sure penalty-free overpayments are allowed. But if they are – and you’re not in immediate need of the extra cash – reinvesting your interest-rate savings in this way is likely to be a better option than adding the money to your savings account.