Q After a recent house move we have about £10,000 in savings left over. We’re now on a two-year tracker mortgage while we navigate the uncertain economic times and rates.
My question is: would it be best to put the savings we have into a one-year fixed-rate account and benefit from an interest rate of 6%, or just put the cash towards overpaying the mortgage?
By saving it we’ll make money from the interest and then after a year can overpay into the mortgage with the added interest we’ve made. Because, as I understand it, overpaying that money into the mortgage now won’t affect our monthly repayment given we’re on this two-year tracker rate? Or have I misunderstood?
JE
A Unfortunately, your understanding is slightly skew-whiff. Overpaying your mortgage will have an impact on your monthly mortgage repayment (which will be immediate if you are charged interest daily, but take slightly longer if interest is calculated monthly as with mortgages from a handful of building societies). This is because overpaying reduces the amount you owe your lender, which in turn, reduces the amount of interest you pay which in turn reduces your monthly repayment.
But you are right in thinking that overpaying doesn’t affect the interest rate you are charged. And this would be the case whatever type of interest-rate deal you have with your lender. The interest rate would stay the same whether you were on a fixed rate, tracker rate or standard variable rate (although this would change in line with interest rates generally but not as a result of overpaying).
Back to what you should do with your savings. If you really can get 6% from a one-year fixed-rate savings account, go for it. But check the small print for any loss-of-interest clauses if you want to withdraw some – or all – of your savings before the year is up.
