Mortgage holders are delighted with the monthly savings that lower interest rates will bring, but should consider using that spare cash to pay down their mortgage or other loans. With deposit rates at historically low levels - and speculation that small savers may eventually even have to pay a fee to the financial institutions to hold their money - investors could arguably get a better return on their funds by reducing their outstanding debts.
Some of the interest rate reductions already announced will yield monthly savings of up to £18 on a £40,000 mortgage and £36 on an £80,000 mortgage and further cuts are on the cards.
Anyone who can afford it should consider using that surplus cash to hasten the repayment of their mortgage. Additional repayments can be easily arranged and are unlikely to have any impact on reducing mortgage interest relief.
It has been established that even paying an extra £20 or £50 a month will take years off the term of your mortgage and save you thousands of pounds in interest payments. Whereas if a similar amount was lodged in a savings account, the return would be negligible at best, and subject to DIRT tax at 20 per cent.
An £80,000 mortgage taken out for 20 years, for example, would incur repayments of more than £600 a month. For an extra £15 a month, you could reduce the mortgage to 19 years, while an additional £50 a month would take three years off the term of that mortgage. By reducing the mortgage from 20 years to 17 years, the mortgage holder stands to save £21,000 in interest payments.
