Paying off debts is the best way to save cash

  • @simonnread

Savers should concentrate on reducing their mortgage if they really want to make the most of their money. New figures published today show that the average homeowner could be £41,665 better off by paying an extra £300 a month on their loan instead of saving it separately.

Figures from First Direct looked at someone with a £100,000 mortgage who made the minimum repayment on their loan while saving £300 a month in a separate savings account over a 25 year term. Based on today's mortgage rates and savings interest, they would pay out £146,988 on their mortgage while saving £104,079.

However, overpaying £300 a month on their mortgage would mean paying it off 12 years early. In the process there would be much less interest to pay so the total would only come to £123,084. That means they would save £23,903.

If they then put the same amount they had been putting into their mortgage each month – £789.96 – into a savings account for 12 years, they would end up with £121,840. That's £17,761 more than what they would have got from saving £300 a month over the whole 25 years.

Overpaying £200 a month could also make a massive difference. It would shave nine and half years off a 25 year mortgage, leaving the borrower £33,000 better off at the end of the term than if they had saved separately.

"The analysis shows that borrowers are often better off paying down their debt ahead of saving as historically the average rate of interest paid on a mortgage has been consistently higher than the average amount earned by saving," says Richard Tolchard, senior mortgage product manager at First Direct.

Mortgage rates have been consistently higher than savings rates over the past decade, he points out. At their highest average mortgage rates peaked at 6.56 per cent in September 2007 while average savings rates peaked at 4.58 per cent at the same time.

The largest difference between rates was in September 2009 when the average mortgage rate stood at 3.69 per cent while the average savings rate was at 1.03 per cent. Now the average mortgage rate is 3.3 per cent while the savings rate is just 1.14 per cent.