Is overpaying your mortgage the best saving of all?
As 2019 moves into full swing, a big priority for every household should be to get their finances into the best possible shape. In recent times we've seen energy prices rocket, the average home insurance premium increase, rail fares rise (again), and the steepest hikes in council tax across England for more than 14 years.
And these are just the pressures we know about. Against a backdrop of uncertainty, the stock market is in turmoil, and confidence in the economy for the year ahead is in short supply. Of course, stock market performance is not exactly a proven portent of things to come, and the general level of pessimism towards the economy may very well be overstated. Nevertheless, the status quo should be enough to inspire you to make extra savings where possible, and, more importantly, get the most you can from the money that you have.
A savings rebound
Following recent rate hikes from the Bank of England, savers have begun to see improved offers within the market for savings. In fact, you can fetch up to 1.5 per cent in an easy access account, and up to 2.7 per cent if you're willing to lock your money away for five years.
Unfortunately, savers don't appear to be taking advantage, with Brits missing out on a collective total of roughly £6bn in savings interest last year (just under £240 per household). Despite a host of options, and simple switching processes thanks to digital marketplace savings services (which collate all savings accounts into one online portal), roughly 90 per cent of easy access cash continues to be held in accounts with Britain's seven biggest banks.
An alternative: mortgage overpayments
It goes without saying that any money being held within a savings account should be working as hard as possible. But even with the recent upswing in terms of offers, savings rates remain incredibly low from a historical viewpoint, and, understandably, putting money into savings is shifting further down the totem pole of priorities for many people.
A more fruitful alternative could be to overpay your mortgage - something which not only paves the way for clearing the debt sooner, but also yields a significant saving in terms of interest paid.
Based on a £150,000 mortgage over 25 years with a rate of 2.5 per cent, repayments would come in at £673 each month. According to a study by Santander, even overpaying by just £10 a month would enable the homeowner to clear their mortgage six months early, and save £1,140 in interest over the full loan period. Ramp that overpayment up to £100 per month, and the amount saved on interest climbs to nearly £10,000, with the mortgage paid off in less than 21 years.
One of the additional benefits is that, by overpaying your mortgage, you accumulate equity at a quicker rate, and your LTV diminishes as a result. As such, you will be entitled to better interest rates each time you look to fix. According to This is Money, the average rate on a two-year fix for someone with a 10 per cent deposit is 2.69 per cent. But if you up the deposit amount to 40 per cent, the rate falls to 1.89 per cent. So, in the case of a mortgage for £150,000, this would cut monthly payments by almost £60.
It's worth checking with your lender how much you are able to overpay, and/or at what point you start incurring a charge. However, more often than not you are able to pay up to a maximum percentage of the amount owed each year (usually 10 per cent) without incurring any extra fees.
A few points to consider
All that said, there is a downside to overpaying a mortgage. Unless you are on an offset mortgage, the extra money paid to the lender cannot be withdrawn at a later stage if you need it. So, while the savings that can be made are significant, it is imperative to ensure that you still have access to a necessary level of funds should your economic circumstances change.
It's also worth pointing out that, with mortgage rates currently at all-time lows, the relative overall savings to be made from overpayments may not be as vast as they would have been, say, a decade ago.
True, the savings you make on mortgage overpayments are likely to eclipse the interest that extra money would have earned on a typical savings account. But it may be that, in your situation, it is more valuable to consider setting aside any extra money for investing - particularly towards something such as peer-to-peer lending, which, given the current stock market volatility, looks to be an especially stable and lucrative option.
Alternatively, you could look to put any extra income into a pension, which has the double benefit of tax relief, and helping to secure your long-term future.
So, is overpaying a mortgage still a good idea?
In many cases, the answer to that question is yes, and the above paragraphs are by no means an attempt to dissuade anyone from doing so. Mortgage overpayments have saved a lot of households plenty of money over the years. The point is merely that each individual situation is different, and each individual has different objectives, priorities and risk appetites.
If you have some extra money set aside each month, but are unsure what the best way forward is, it may be worth consulting a financial adviser to help you decide. As long as you are taking proactive steps optimise your finances as much as possible, then you can rest assured that you're on the right path to a prosperous 2019.
There is barely a week to go until the conclusion of the 2017/18 financial year, which means that, as ISA season begins to hot up, time is running out to take advantage of your ISA allowance.
At the Summer Budget in 2015, George Osborne had multiple nuggets of good news for investors in peer-to-peer lending (P2P), most notably the announcement of the new Innovative Finance ISA (IFISA).
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
Loan underwriting is the process that we undertake to analyse all of the information provided by each loan applicant and their credit file to assess whether or not that applicant meets our minimum loan criteria. As part of that process all data is verified, analysed and summarised to paint a picture of each applicant.
When you earn interest from a regular bank savings account, for example, the bank automatically deducts basic rate tax (currently 20%) before paying your interest. With interest earned from peer-to-peer lending, tax is not deducted automatically so lenders will need to declare their income to HMRC.
As 2018 draws to a close, with our bellies full of Christmas turkey, it's only natural to look back on the past 12 months and reflect. No doubt, it's been a turbulent one economically and politically, and not everyone has had it all their own way.