Rate Cuts Left you Better Off? 4 Things to do with Your Mortgage Savings

• Top Tips
• Published: 19 Mar 2009 in Money and Mortgages

If the steep drop in interest rates means you now have a cheaper mortgage, here are some tips on what to do with that extra cash.

1.   Mortgage overpayments

Overpaying your mortgage each month will clear the debt quicker and potentially knocking years off your mortgage term.

For example, a borrower with a £150,000 tracker mortgage will have seen their monthly repayments drop by nearly £400 since interest rates peaked. Using this surplus money to overpay the mortgage each month, and making the same overpayment for the rest of the term, could reduce a 25-year mortgage by 11 years.

However, check first whether your mortgage provider will level any penalty fees for making overpayments.

2.   Pay off other debt

Often, loan and credit card repayments will be subject to much higher interest rates than a mortgage. In general, you should try and repay debts with the highest interest rates first. So it might not make sense to prioritise making overpayments on your mortgage, if you have outstanding credit card or loan debt on which you’re paying double-digit interest. Basically, do your sums and see what the most effective use of the surplus cash is.

3.   Save for a rainy day

While it’s generally recognised that paying down debt should be a priority, it’s also worth considering saving some of the extra money you have each month.

It’s a good idea to aim for savings of between four to six months’ pay to set aside for emergencies, or in case you’re unable to work or lose your job. In the current economic climate, even though savings interest rates are generally not as good as they were pre-credit crunch, having a bit of extra cash stashed away for a rainy day could provide a vital safety blanket.

It’s also worth saving towards events or purchases in the future, such as buying a new car that you might previously have taken out a loan to fund. Using your own savings is not only cheaper and more prudent than borrowing the cash, the credit crunch has made borrowing more difficult as lenders have tightened their lending criteria and increased their repayment interest rates.

4.   Pensions

It’s easy to push pensions to the back of your mind when planning finances, after all retirement may be decades away. But where pensions are concerned it pays to start saving early.

But how much to put aside? Only you will know how much you can afford, but the more you save, the more comfortable your retirement will be.

One suggestion of how much to put into a pension is to set aside a percentage of your salary that’s equivalent to at least half your age each month.

This might seem like a scary amount but the good news is your employer may help with contributions, and for every 80p a basic rate taxpayer saves and every 60p a high rate one puts into a pension, the Government will top up by £1 through tax relief.

Though, be aware that once you’ve put money into a pension, it’s locked up until you retire.