The Bank of England recently raised the base interest rate to three percent, immediately hiking variable and tracker mortgages that change depending on the base rate, but also incentivising savers to keep their money in their accounts. Money Saving Expert founder Martin Lewis was on ITV’s This Morning yesterday when he had a question from someone looking to pay off their mortgage with funds from an ISA.
A viewer called Val wrote in: “Given the change in interest rates, would it be better to pay off the remaining £10,000 of my mortgage with the £10,000 I have from an ISA? I have less than two years on my mortgage.”
Mr Lewis said in response that the key issue is not the interest rate hike but rather how the mortgage product works.
He said: “The change in interest rates is irrelevant, it’s what your mortgage rate is that counts.
“If that mortgage rate is going to change because it’s variable because of the interest rates, it does factor in.
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“Very simple rule of thumb – if your mortgage rate is higher than the amount that you can earn in savings, then it is generally better to overpay or pay off your mortgage than to put money into the savings.
“If it’s the other way around, you’re better off to save. The caveat to that is I’d always keep an emergency fund – three to six months worth of bills. And I’d make sure there are no penalties for overpaying.”
He also said in some cases even if the savings rate is higher it’s a good idea to pay off a mortgage.
He said: “If you’ve got a long time left on your mortgage, you can still be better off to overpay your mortgage.
“If you are sitting on money in cash savings, aside from leaving a rainy day fund, you may want to seriously think about using them to overpay on your mortgage as chances are your mortgage interest rate is going to be higher than deposit savings rates going forward.
“Over the life of a mortgage, this could save you thousands in interest.”
Lewis Shaw, from Riverside Mortgages, warned there is no guaranteed technique for reducing mortgage costs as every measure has a trade-off.
He said: “One way is to extend the term of your mortgage, which reduces your monthly payment. However, the downside is you will pay more in interest over the term.
“The other way to reduce payments is to opt for a variable rate mortgage as they’re now lower than fixed rates.
“But again, the trade-off is accepting the risk that payments could go up and down and being prepared for that.”
He also recommended overpaying on a mortgage as a way to reduce the total amount a person pays.
He said: “To keep costs down and get the best deal possible, talk to a great independent mortgage broker, ensure you’ve saved up as much for a deposit as possible, and always pay everything on time to bolster your credit score.
“In the longer term, overpaying your mortgage by as little as £50 a month extra can shave years off your total mortgage term and significantly reduce the amount of interest you pay.”
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