The mortgage market is in a state of turmoil, as deals are being regularly withdrawn and replaced with contracts carrying more punitive interest rates.

This has been driven by the Bank of England tightening monetary policy, but also more recently some bad inflationary data which has caused the market to raise its expectations for future interest rates. Unfortunately, even if those expectations don’t come to pass, they still affect mortgage pricing in the here and now.

I’VE GOT SPARE CASH: WHAT SHOULD I DO WITH IT?

For those with some spare cash to allocate, the question of overpaying a mortgage is a live one. Doing so could make your next remortgage a much less painful experience.

It’s usually a good idea to pay down debt where possible, but savings rates are so high right now, it might tempt some borrowers to stash their cash rather than paying down their mortgage immediately.

The plan involves using the capital and interest accrued in the savings account to reduce debt when you next remortgage.

Whether this is a good idea or not very much depends on the differential between the mortgage rate you’re on, and the cash savings rate you can pick up. For the latter, it’s important to calculate the return you’ll get after tax, to reflect the actual cash return you’ll get in your pocket.

HOW MUCH COULD I GET ON CASH?

The best fixed-term accounts are offering 5.9% right now if you’re happy to lock up the money for two years. Vanquis Bank, SmartSave and Tandem had the best rates at the time of writing. That amount compares favourably to current mortgage rates, but looks positively splendid compared to older, less expensive mortgage deals which some people are still enjoying.

For those who are lucky enough to be paying 2% or less on their mortgage, bagging a savings account might be a better idea than paying down the mortgage, because the rate is so much better.

If you use fixed-term accounts to achieve this, it’s vital you ensure the cash will be available by the time you remortgage, rather than still being locked away under the terms of the account.

DON’T FORGET TO THINK ABOUT TAX

Tax significantly erodes the benefit of this approach too. A savings rate of 5.9% equates to a post-tax return of 4.72% for a basic-rate taxpayer, 3.54% for a higher-rate taxpayer and 3.24% for an additional-rate taxpayer.

Generally speaking, the higher the tax band you sit in, the more it will make sense to pay down your mortgage rather than using a savings account.

THE BENEFITS OF THE PERSONAL SAVINGS ALLOWANCE

There is some mitigation for the portion of your interest taken by the taxman, in the form of the personal savings allowance.

This allows basic-rate taxpayers to receive £1,000 of interest tax-free. For higher-rate taxpayers this figure is £500, and for additional-rate taxpayers it’s zero.

You can get tax-free interest from a Cash ISA too, though the rates tend to be slightly lower than other savings accounts, and you’re limited to
saving £20,000 in each tax year. You would also have to relinquish the ISA wrapper when you withdrew funds to pay down debt at your next remortgage date.

If you decide to use cash funds to pay down your mortgage, you need to watch out for overpayment charges too.

Many mortgages will only allow you to overpay a certain amount each year, often set at a maximum of 10%, though some will be lower.

If you pay back above this amount, you start to rack up large penalty fees, and the whole endeavour becomes uneconomical. So, it’s important that before you start to overpay, you check the terms of your mortgage to make sure you don’t face any such charges and adjust your overpayment amount if you do. You also need to make sure you maintain enough cash for a rainy-day fund, so you don’t find yourself caught short.

Mortgages are a relatively cheap way of borrowing, so you should probably attend to any other debt before your mortgage, because it will likely be costing you a whole lot more. This includes personal loans, store cards and credit cards. The average rate charged on credit cards is 20%, significantly more than today’s unforgiving mortgage rates.

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