Cut your loan while good times roll

Money news by Lorna Bourke
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Some 3.5 million home-owners with tracker or variable-rate mortgages have seen their monthly repayments plummet — in some cases to nothing.

A homebuyer on a tracker at bank base rate plus one per cent would have been paying six per cent on their mortgage last summer — now they are paying only 1.5 per cent. Someone with a £300,000 home loan could have seen their monthly interest payments shrink from £1,500 a month to £375 – so they have an extra £1,125 in their bank account at the end of every month.

For those with expensive credit- card borrowing, it makes sense to pay this off, plus any overdraft or personal loans. After that, is it best to save the surplus funds or pay off more of the mortgage?

Barclays has just launched a regular savings account paying a handsome 5.84 per cent gross. This works out at 4.68 per cent after basic rate tax, or 3.5 per cent after tax at 40 per cent — still well above the 1.5 per cent or less that many tracker borrowers will be paying on their mortgage.

* It pays to save, build up a fund and keep control of your money. If, at a later date, you choose to pay off a lump sum on the mortgage, you can do so or you can keep the money ready as emergency funds to meet higher repayments once interest rates start to go up again.

* For the weak-willed tempted to spend, it’s probably better to make higher repayments to shorten the term of your mortgage and pay off more of the debt.

* Simply maintaining monthly payments at last summer’s level will cut the term of a loan by about 10 years.

* Anyone with an interest-only mortgage should consider switching to a repayment loan to start paying off the capital.

* Savers should remember that the (Isa) allowances for the year will be used up on 5 April. They can invest up to £3,600 in cash or £7,200 in equities.

* There is also just time to buy missing years of NI contributions for only £421 for each year. The cost shoots up next year.

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