Saving Is Pointless Right Now, So I’m Reducing My Mortgage

Usually around this time of year, as the summer begins to wind down and I’m putting my Speedos away in storage, I start receiving letters from various banks informing me that it’s time for me to bend over and get shafted by their biggest and their best. It’s their loving way of telling me I’m about to crawl out of their introductory interest rate period for their savings accounts, and proceed onto their shitty standard variable rates. Exciting times. I generally have 3 savings accounts, an ISA, a ‘Easy/Regular Saver’, and ‘1 year fixed-rate online saver’ It’s the latter two which usually need changing, because ISA rates don’t really fluctuate.

Many of you will already be aware that the last few years haven’t been too kind to savers since the UK base rate has been stuck at a measly 0.5% for the last century. Mind you, I’m not complaining, because I have debts too, so I’m currently benefiting from the record lows. Swings in roundabouts, innit!

But generally speaking, most borrowers would have been better off reducing debt rather than saving, because debt has been costing more than what savings are generating in interest. But the difference between the two margins haven’t been terribly huge for me, personally. For example, I currently have a mortgage with a 3.79% interest rate and I had a savings account which was giving me a 2.96% return (after tax). If I wanted to make my money work as hard as possible, I would have used my savings to reduce debt. The reason I went against good sense was because the amount I was losing out on by saving wasn’t enough for me to concern myself with (just under 1%).

I think it’s safe to say that most people prefer saving than reducing debt- there’s something undeniably sexy and comforting about having a positive bank balance and disposable cash. I like having disposable cash available to fund my ridiculously inappropriate lifestyle. You know, exotic bitches, exotic holidays, exotic cocktails and exotic (and domesticated) penises up my bum. It all comes at an extremely unreasonable price. But in reality, when you crunch the numbers, it actually doesn’t make any financial sense to feel better about having savings when we have debt that’s costing us more.

So while the last few years haven’t been terribly great for savers, they could have been worse… which low and behold, they officially are.

As I was scouring my beady eyes at the best savings accounts currently available, in hope of getting a worthwhile return on my savings, it became clear that I wasn’t going to get my semen-stained mitts onto anything other than dog-shit products. Those mediocre 3% interest rates for savers are nothing but a distant memory; the average saver should now expect to indulge themselves on a bullshit 1.5% rate (or there abouts). Brilliant.

As far as I’m concerned, it’s not even worth saving large amounts of cash while I have outstanding debts that’s costing me 3%+ on interest. The gap between ‘debt’ and ‘saving’ interest rates have become too large. This particularly applies to landlords with BTL mortgages that want to reduce their mortgage as part of their long-term strategy, because the interest rates on those puppies are usually “blow-your-brains-out” bad! However, if you do plan on reducing your BTL mortgage, consider the tax implications!

The best rate I can find for a savings account, without being tied in for 3+ years, is 1.99% (before tax). If I want to tie my money in for the next 5 years (which of course I bloody don’t), I can get a pathetic 3% return (before tax). I’d rather try my luck on the stock market and invest in a company that’s researching technology to replace petrol with donkey urine.

I don’t want to get into the technicalities of “Saving VS Reducing debt” because there are already plenty of good and useful articles on the money saving expert website that covers all bases. If you haven’t done so already, I would highly recommend scouring through that shizzle on your Friday night and consider it a wild and thoroughly satisfying evening. I did.

But if you can’t be bothered, I’ll understand, and here’s an easy to digest example from Money Saving Expert explaining how in this climate, someone with a mortgage and savings, might be better off reducing their debt:

Mortgage Vs Debt

My specific case

I’m not saying in all cases reducing debt is the better option, there are of course, exceptions. But in my specific case, it made much more sense to reduce debt right now, as opposed to keeping all my money tied into a savings vessel which is operating at the same efficiency level as a penis with poor blood circulation, and I imagine it’s the same for most people in my position. I’ve always been a firm believer in making my money work as hard as possible. Unfortunately, if I was to deposit all my savings into a 1.99% savings account, my money wouldn’t even be sleeping, it would be on its back, dead in the water.

Here are my real figures/savings:

BTL mortgage vs debt

It doesn’t seem like a lot in the short-term, but i’m still better off by almost 50%. But here’s the real beauty: overpaying my repayment-mortgage by £10,000 will reduce the interest I pay for all 19 years of what’s remaining on the debt, and not just for the next 12 months- the amount I’m saving in the long-term is substantial. Assuming I stick to the same product/term/payments and interest rate remains at 3.79% (which it almost certainly won’t), I will have saved approximately £9,300 in interest over the duration of 19 years and repaid my mortgage 2 years and 3 months earlier. You can workout how much you can potentially save by reducing your mortgage by using the mortgage overpayment calculator. Please bear in mind, when reducing your BTL mortgage, there maybe tax implications with overpaying e.g. Capital Gains Tax.

General rule of thumb, if your mortgage rate’s higher than after-tax savings interest, you’ll profit by overpaying it rather than building savings. Of course, if you want to increase your debt by expanding your property portfolio, none of this even matters.

Anyways, none of this should constitute as financial advice. You should do whatever tickles your balls. But if you have debt and savings, perhaps it’s something you should consider.

Just to clarify, I’m still begrudgingly keeping a chunk of my money in a savings account, so I’m not using ALL my savings to clear debt, just some of it. But it’s something I wouldn’t have ordinarily done, but I felt I was left with no choice this year as the interest rates I’m being offered as a saver, are simply, frightfully detrimental to my health.

Anyone else in a similar position or had to make a decision between saving and reducing debt? Let’s hear it then!

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14 Comments- Join The Conversation...

Guest Avatar
Tom 16th September, 2013 @ 13:20

Sounds like a good idea, but there is one more factor to consider - if you reduce your mortgage payment on a BTL by (let's say) £200 the Chancellor with his grubby mitts will show up on your doorstep asking for 20% of it in tax - or 40-50% if you are a higher rate tax payer...

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The Landlord Avatar
The Landlord 16th September, 2013 @ 17:35

Hi Tom,

Good point, I should have made a specific note of that. But there are details about tax on the MSE website, and all the other technicalities! I've added a disclaimer to my post though!

Cheers!

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Guest Avatar
Graham 17th September, 2013 @ 12:25

Whats the constant ref to genatals all about? like reading the VIZ

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The Landlord Avatar
The Landlord 17th September, 2013 @ 12:32

No idea really, I guess I'm just pretty gay.

I never read VIZ. Is it the comic book with the two obese women? Sounds like a good read.

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Guest Avatar
Graham 17th September, 2013 @ 15:16

you mean The fat slags, Yes and the great "Sid the sexist" TITS OUT

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Guest Avatar
Paul Barrett 18th September, 2013 @ 15:30

One consideration for not using surplus funds to pay down mortgage debt.
This is personal liquidity.
I prefer to keep £10000 in poorly performing savings account than pay the money into a mortgage account.

On your figures it would cost me 52 p a day to keep my £10000 out of the mortgage company's clutches.
For me it is a price worth paying
It is NOT easy for credit to be obtained anymore.
You would struggle to ever recover it from the mortgage company at negligible cost.
It might seem bizarre that I am prepared to pay a charge of interest to keep my money in a savings account and out of my mortgage account.
Cash liquidity is not easy to find.
I have mine and I am not prepared to give it up for the sake of saving £187 per year.
LL always should have liquid cash for the hazards that being a LL throws up!!!
So the cost of not paying into a mortgage account is minor compared to the possible situation of NOT being able to access instant cash funds.

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Guest Avatar
Deano 19th September, 2013 @ 08:41

All very useful info as ever, I'm also a big fan of MSE. I have a btl with a fixed rate but am able to pay up to £10k pa, without penalty, off the capital. I can also draw down on these extra payments by simply calling the bank and requesting the money (or a potion of it) which they duly send out to me via cheque within a couple of days. It's like having a savings account which matches the interest rate of my mortgage. For full on emergencies, I have a credit card!

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Guest Avatar
Paul Barrett 19th September, 2013 @ 09:34

That is what a Lots of Abbey customers thought until ABBEY kept the overpayments and reduced the LTV of mortgage.
MX have done the same with their 'Choices' overpayment option.
I would NEVER trust any bank as to their returning overpayments on request to the borrower.
You are taking a big risk in expecting your bank to maintain the facility.
If I was you I would never use one of these flexible mortgage facilities as the banks can't be trusted.
Many people with overpayments were caught out by lenders retaining such overpayments to reduce LTV.
They bankrupted many homeowners who were relying on borrowing back their overpayments.

8
Guest Avatar
John Tsigarides 25th September, 2013 @ 10:08

Santander 123 Current Account, Easy-Access, 3% year APR

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Guest Avatar
andrewa 5th October, 2013 @ 18:57

Remember, if your mortgage rate is for example 10% then every pound extra you pay into it is earning the 10% interest you are NOT paying on that amount of capital deducted from your mortgage. Plus if you earn say 5% on a savings account HMRC will want some of it as "income" tax whereas the interest SAVED on money placed into the mortgage is not classified as income so you pay no tax.

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Guest Avatar
Paul Barrett 5th October, 2013 @ 19:35

You miss the point; once funds are paid into a mortgage they are very hard to recover from the mortgage.
Yes you may save paying 10 % interest; but you will look a bit stupid if by paying off debt you have insufficient spare funds to make mortgage payments which may increase by £300 pm.
I'd rather keep £10000 of spare funds in a savings account than not have enough to pay the monthly mortgage payment.
It would take 33 months to use those funds up in additional mortgage payments.
During that time a property would not be repossessed due to insufficient funds to pay the mortgage.
I know cos i have been in that position and used saved funds that I could have used to pay down mortgage debt.
Had I not had those saved funds the property would have been repossessed.
Therefore it is worth paying a price for liquidity; which after all is NOT so readily available these days!!

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Bacon bap 20th October, 2013 @ 09:14

You could get an offset mortgage as your personal mortgage and put any spare cash in there to reduce the interest paid whilst still having access to it whenever you need it?
Result = less interest paid + personal mortgage term reduced + no income tax paid + easy access to cash

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Guest Avatar
Paul Barrett 26th October, 2013 @ 04:14

There is a problem with these offset accounts.
That is you can't trust the bank NOT to take offset funds to reduce the LTV on the mortgage.
Many Abbey customers were caught out by this condition tucked away in the back of the conditione booklet.
NEVER trust a bank!!

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Guest Avatar
Mark 19th February, 2014 @ 15:45

Thanks for the article! To my mind if people could save money they wouldn’t have problems with their credits. I also had a mortgage for my house. And yes, it was rather difficult period for me by I could cope with it. I think everyone can! People should understand that paying off their mortgages early is one of the best investments they can make. When you get rid of your debts you are so happy, as never before! Finally you can breath! And get one more loan)))LOL Add an extra payment each month, pay a little bit more every month and you’ll see how the situation improves. Lastly, the most widespread way to save money on your mortgage is by refinancing to a lower interest rate. Many people choose this way.

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