Saving Is Pointless, So I’m Reducing My Mortgage – Should You?

Comical savings interest rates

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 – because I’m about to get thrown out of their introductory interest rate period for their savings accounts’, and tossed onto their diabolical standard variable rates (SVR).

I have 3 savings accounts, an ISA, Regular Saver, and a Fixed saver, all of which I opened at approximately the same time. It’s the latter two which usually need shifting to better deals, because ISA rates aren’t as volatile.

Many of you will already be aware that the last few years have been comically cataphoric for savers, with the UK base rate being so woefully low for the last century (currently a pathetic 0.1%. I mean, seriously, what’s the shitting point?).

Who would have ever thought that saving would become so hideous that it actually makes more sense to reduce debt! What in the fuck?

Generally speaking, I think most of us that are riddled in debt would be better off – strictly from a mathematical point of view – trying to reduce it, rather than depositing our disposal income into an uninspiring savings account, where it’s inevitably going to get swallowed alive by inflation.

Ultimately, many of us are in the position where the interest we pay on debt is now significantly more than the interest we’re making from our savings. This wasn’t the case until recently, at least it wasn’t for me. For example, I currently have a mortgage with a 3.79% interest rate and I had a savings account providing a 2.96% return (after tax).

If I had half a brain and wanted to make my money work as hard as possible, I would have used my savings to reduce debt. The reason I gave good-sense the middle finger was because the amount I was losing out on by saving wasn’t enough for me to concern myself with (just under 1%).

Also, psychology undeniably has a massive part to play with our saving habits. Understandably, most of us receive great comfort from saving money, even though we’re mostly screwing ourselves over by not using that money to kill our debt.

So, anyways, while the last few years haven’t been terribly great for savers, they could have been worse.

Today? Well, they’re officially the worst!

So as I was scouring my beady eyes at the best savings accounts available – deciding where to shift my money next, once the SVR kicks in – it quickly became clear that I wasn’t going to get my mitts onto anything other than dog-shit products. Those mediocre 2-3% rates savers were benefiting from are but a distant memory. The average saver should now expect to indulge on a bitterly bullshit 0.5% rate at best. Brilliant.

It’s officially time for me to kill my mortgage debt

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 1%+ on interest.

The gap between the interest rates for debt and savings have become far too large, so over saving makes very little sense. That’s especially for landlords with BTL mortgages, because we now have to grapple with the recently introduced the Section 24 fiasco.

On a side note, with interest rates being so puny, now is a great time to remortgage if you can! I highly recommend checking out Habito (a free online mortgage broker) if you want to compare the market and see what’s available for you.

I don’t want to get into the technicalities of “Saving VS Reducing debt” because that’s already been perfectly explained on the the money saving expert website. If you haven’t done so already, I 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

To clarify, I’m not saying reducing debt is the better option in all cases or for everyone. In my specific case, it made much more sense to reduce debt right now, as opposed to hoarding my money in a savings vessel.

Actually, I’m going to take my disclaimer one step further and clarify that I am NOT a financial expert. None of this should constitute financial advice. You should do whatever tickles your balls. I’ll add another disclaimer at the of this blog post – covering how comically unqualified I am – for good measure.

What I will say though, is that if you have debt and savings, perhaps you should consider whether it would be more beneficial to use your savings to reduce debt.

I’ve always been a firm believer in making my money work as hard as possible. Alas, if I was to deposit all my savings into a 0.5 savings account, my money wouldn’t even be sleeping, it would be on its back, dead in the water.

General rule of thumb is that if your mortgage rate is higher than after-tax savings interest, you’ll profit by overpaying it rather than building savings.

I’m still keeping a chunk of my money spread across different savings accounts, so I’m not using ALL my savings to clear debt. Everyone should have access to an emergency fund for all the obvious reasons. However, I am spending more money on reducing debt than I would have ordinarily done simply because of how laughable interest rates are for savers right now.

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

14 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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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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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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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.

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John Tsigarides 25th September, 2013 @ 10:08

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

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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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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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