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:
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:
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!