With interest rates increasing and a large number of the UK population coming out of their fixed rates, we have had a few clients ask us “Should I pay down my mortgage?”.
Over the last 12 years or so, money has been extremely cheap and a large proportion of new homeowners have not seen rates like we are experiencing in 2022. So now many are asking, should I begin making overpayments?
You are still within your fixed rate period
If you fixed for five years or more before the base rate began to rise, you are likely to be shielded from the current rises in interest rates for now. Many though, are wondering if they should begin paying down their mortgage now to prepare for when they remortgage. Cash accounts are currently offering rates from between 2-5% depending on whether you fix the rate, and for how long. If your mortgage interest rate is below this amount, then it’s likely going to work out better saving any spare cash to receive additional interest and then make overpayments later down the line. If you’d like to find out what cash rates are on offer in the market at present, you can check these here Best savings rates: Compare branch and online savings accounts | This is Money
Please remember to ensure that you only deposit funds into banks offering FSCS protection.
One thing to note, if you are a higher rate taxpayer, there is a limit to how much interest you can receive free of tax outside of an ISA. At present, it is £500 per tax year. If you are an additional rate tax payer, any savings interest outside of an ISA is subject to tax. It might make sense on a net basis to pay down the mortgage as if you pay 45% tax on £1,000 of interest, clearly the net interest of £550 represents a much smaller rate of return. Of course, you won’t pay tax on cash held within an ISA.
You can find out the effects of making overpayments here Mortgage Overpayment Calculator: Pay off your debt early?… (moneysavingexpert.com)
Should I cease my pension contributions?
This is a question we have been asked a lot, and with the increase in energy prices, fuel, goods and services etc. It is understandable that many want to focus on surviving now as opposed to building a nest egg for the future. The thing to remember is that any mortgage overpayments are going to be out of your net salary, whereas any pension contributions are going to result in tax relief at your marginal rate. So, if you pay 45% tax you are paying 45p out of every £1 of salary that you earn. Pension contributions will save you that 45% in tax and the pension fund itself grows largely free of tax. The principle remains if you are a basic rate tax payer (20%) or a higher rate tax payer (40%). In addition, if you are salary sacrificing, you’ll also avoid any national insurance on the salary you sacrificed.
We would still suggest contributing as much as you can right now, even if a small amount, as the effect of compounding and the disciplined saving you maintain right now will benefit you in the future. Retirement comes round quicker than many would like!
For more tips on maximising your pension, see our recent post here Three ways to boost your workplace pension – Sterling & Law – Rayleigh (sterlingandlaw-rayleigh.co.uk)
News headlines, twitter feeds and other media can really add to the uncertainty we feel now and times are likely to be tougher than we’ve had in recent years. If you can do so, try your best to stay out of unnecessary debt, cut back where you can and if possible, approach your employer about a salary increase to ensure your wage is retaining its value in real terms.
What to do now?
As you might expect, the situation can become incredibly nuanced depending on your circumstances, objectives and goals, so we would suggest that you get advice to help you consider your options. As your local independent financial adviser in Rayleigh, our first consultation is always on us.
If you would like independent financial advice, please get in touch via the details below.
T: 01268 944122
E: p.denning@sterlingandlaw.com
To find out more please visit About us – Sterling & Law – Rayleigh