TO SAVE OR NOT TO SAVE: With interest rate at an all-time high, it can be hard to tell if you should be saving money, or paying off the mortgage (Image: ITV)
In his Money Tips newsletter, financial guru Martin Lewis shared a ‘lucrative’ strategy that could save homeowners thousands on mortgage payments. Highlighting a success story where a man saved £35,000, Lewis suggested that regular overpayments could lead to substantial savings and faster mortgage repayment.
Giving an example, Lewis said his first rule is that if your mortgage rate is higher than what you can earn in savings, then you could benefit from overpaying. If someone earns £400 in interest from £10,000 in savings with a 4% interest rate, they could use this money to overpay a 6% mortgage.
According to Lewis, this could save people £600 in interest. He explained that using savings to overpay is like saving money tax-free at the mortgage rate. If done correctly, it can lead to big savings.
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Paul, a reader of Money Saving Expert, used this strategy to lower his mortgage costs long-term. In an email to the Money Saving Expert (MSE) team, Paul wrote that he and his wife bought a property with a 100% mortgage when they changed jobs seven years ago.
After hearing Lewis’s advice, Paul started making regular, small overpayments on his mortgage to pay it off faster. He also used any extra money he earned from working overtime to make overpayments.
Paul said: “We’ve saved £35,000 in interest and knocked 10 years off our mortgage which was originally 27 years. We’re continuing to plan to get rid of the mortgage altogether as soon as possible. Thanks for all your help and advice.”
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Anyone interested in doing the same can use MSE’s mortgage overpayment calculator to break down the savings that could be made. However, Lewis cautioned that while overpayments can help reduce mortgage costs, borrowers need to consider various factors, such as getting the highest savings interest rate, checking for overpayment penalties and maintaining an emergency cash fund.
According to the financial guru, people should overpay ‘the right way’ and put extra cash towards reducing their term. Shortening the term of someone’s mortgage deal will result in an interest gain, but if someone has a cheap mortgage rate, it might be better to keep money in high-interest savings accounts instead of making regular overpayments, he explained.
Here are Martin Lewis’s top six tips:
- If your mortgage rate is higher than what you can earn in savings, it’s smart to make extra payments.
- Make sure you’re comparing your savings to the highest interest rates available. If your savings only earn a small amount, it’s easy to switch to accounts that pay more interest. Also, check that your mortgage interest rate is as low as possible using best buy comparison and remortgage guide.
- Before making extra payments, check if there are any penalties for doing so and always keep some money aside for emergencies.
- Even if it seems like saving might be better financially, sometimes it still makes sense to pay extra towards your mortgage. Use Mortgage Overpay vs Savings Calculator to see the difference in savings. If savings are significantly better, then save. You can click here to learn more about what to do if the difference is small.
- When you make extra payments, focus on reducing the term of your mortgage.
- If your mortgage interest rate is still low, it might be better to save your money instead. However, keep saving so you have access to the money when your current deal ends. You could use fixed-term savings accounts that mature just before you need the cash.
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