In the past six years, the Bank of England has presented home owners who have savings with a dilemma that it is difficult to resolve.
The slashing of the base interest rate to 0.5 percent has resulted in falling rates on mortgages, making borrowing to afford properties cheaper but the savings slump has returned..
A property owner with spare cash might be less concerned about paying extra on his already cheap home loan, but also may feel he has less incentive to pour cash into a savings account that pays a low interest rate.
This blog doesn’t pretend to have the answers to this conundrum and couldn’t give advice even if it did. Instead we will explore the various options of home owners and savers.
Paying off the mortgage faster
By paying extra off your mortgage every month you are speeding up the day that you finally are able to live mortgage free and being able to limit the amount of time you spend in hock to the bank will have the effect of cutting down on the overall interest payments you make. It might seem like a sacrifice at the time, but the quicker the debt is repaid the less it costs you in the long run.
So why doesn’t everyone pay off their mortgages early? Most of us are fixed on spending in the moment and enjoying money while we have it, instead of delaying gratification for the future.
If you are planning to pay off extra on your mortgage every year then you need to make sure you can sustain the monthly committment.
Don’t commit to overpaying more than you can afford – start off with a conservative sum that you know will be easy to stick to and gradually increase it as the months go by.
For some the initial excitement and enthusiasm of paying extra wanes as the months go by and ambitions slip. Therefore, in order for overpaying to be a serious, realistic strategy it must be maintained over the long term.
Adding to savings
As mentioned above, the current financial climate is not one that suits savers. There are few incentives for the people who have spent years building up their nest egg as the rates of return, whilst higher than the base rate set by the Bank of England, they are generally far lower than they were before 2008.
So why save at all?
There are still reasons to save, it is always important to have emergency funds tucked away, irrespective of interest rates and if you put your savings in an ISA you will enjoy protection from taxation and accrue monthly interest.
The rate of interest is also unlikely to remain at the current historic low which means that in the next few years the returns on savings will inevitably improve.
The inevitable choice
As interest rates gradually increase, there will be an incentive both to save and to overpay on a mortgage and while savings will be better rewarded with higher interest, mortgage debt will be more expensive making it more important to repay it as quickly as possible.
Without a thorough audit of your circumstances and your financial strengths and weaknesses, it is difficult to know precisely which option to take which means that before you commit to either, it may be a good idea to get some independent financial advice.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE