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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
When you overpay your mortgage, you reduce the amount you owe to the bank. You are therefore no longer paying interest on that chunk of debt. “Overpaying means you make the same gain as saving at your mortgage rate,” says Martin Lewis on MoneySavingExpert. “If you’ve a 3% mortgage, you’d need savings paying at least this.” Lewis gives the example of a 2.99% mortgage versus a savings account paying 1% interest. If you have £10,000 in a savings account, it will earn £100 interest a year. Pay off £10,000 of the mortgage and you’ll save £299 a year interest, meaning you’ll be £199 better off.
But there are some things you need to consider before your pay off a chunk of your mortgage. Firstly, can you afford to part with your savings? We live in uncertain times and having an emergency fund to fall back on is more important than ever. Keep around six months’ worth of earnings in an emergency savings pot to cover anything from a broken boiler to redundancy.
Keep an eye on charges
Secondly, will you pay an early repayment charge if you overpay? “Most mortgage providers allow you to overpay up to 10% every year without incurring early repayment charges, but charge steep fees beyond that amount,” says Rachel Rickard Straus in the Mail on Sunday. Check what your mortgage deal allows before you make an overpayment. Finally, think about paying off other debts first. Your mortgage will have a lower interest rate than any unsecured debt you have, such as a credit card, overdraft or loan. There is no point in paying a lot of interest on these debts while you have excess money in the bank earning next to no interest, so clear these debts first.
-
The top stocks in the FTSE 100After a year of strong returns for the UK’s flagship index, which FTSE 100 stocks have posted the best performance in 2024?
-
A junior ISA could turn your child’s pocket money into thousands of poundsPersuading your child to put their pocket money in a junior ISA might be difficult, but the pennies could quickly grow into pounds – and teach them a valuable lesson about money
-
Parents face £1,000 'nanny tax' – how to afford itHiring a nanny is about to become even more of an expensive hassle for families, especially those in London. Here's how to cut costs
-
Is it cheaper to be a sole trader?It might be cheaper to be a sole trader due to changes to the tax system
-
The best fintech apps on the marketFrom digital banking to investment platforms, here are the top fintech apps on the market right now, according to David C. Stevenson
-
What pension providers don't tell you about your retirement moneyCheck the small print from your pension provider or risk losing thousands.
-
Britain’s stifling tax burdenChancellor Jeremy Hunt's Autumn Statement will see the tax burden rise in each of the next 5 years.
-
Brace for a year of tax risesThe government is strapped for cash, so prepare for tax rises. But it’s unlikely to be able to squeeze much more out of us.
-
Lock in high yields on savings, before they disappearAs interest rates peak, time to lock in high yields on your savings, while they are still available.
-
Are lifestyle funds still fit for purpose?Lifestyle funds have failed to do what they were supposed to do – shield savers from risk in the run-up to retirement.
