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Blog: Better a saver or a spender be?

by: Melanie Bien
  • 05/10/2010
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Blog: Better a saver or a spender be?
Debate is raging as to whether we are better off saving or spending

Charlie Bean, deputy governor of the Bank of England, is definitely in the latter camp: he reckons the best way we can help kick-start the economy is to spend, spend, spend.

Theoretically, he’s right that this would boost the economy but this approach sits uneasily in a world where over-spending is a large part of the reason we find ourselves in this mess in the first place.

Saving seems far more prudent and responsible, even if rates on savings accounts are negligible. With uncertainty all around, the threat of job losses and further cutbacks, a financial cushion to pay the mortgage and other essential bills should we find ourselves out of work, seems the most sensible approach of all.

But I would argue that neither on its own is the right approach, and it seems that a lot of people agree with me. Fed up with poor savings rates, many are overpaying on their mortgage, according to new figures from the Bank of England, instead of letting their cash languish in a traditional savings account. With mortgage criteria tight, and expected to become even more so in coming months as lenders become concerned about rising unemployment, the importance of a significant chunk of equity in your home can’t be underestimated.

A low loan-to-value on your mortgage is priceless these days. It means you get your pick of the deals when you come to remortgage – and pay significantly less on the rate. It means that when you apply for another mortgage, while credit scoring will be an issue, it won’t be as ridiculously tough as it would be if you only had 10 per cent equity. It means negative equity isn’t going to be an issue for you, even if property prices do slide further.

Overpaying on the mortgage also enables you to clear your mortgage more quickly, potentially saving you thousands of pounds in interest.

Just one word of warning: keep some cash back for emergencies. Money overpaid on the mortgage is extremely difficult to get back, unless you have flexible terms. And check how much your lender will let you overpay without penalty before taking the plunge as paying a charge for being prudent is plain daft. Most lenders will allow 10 per cent of the mortgage amount per annum, which is enough for most people.

By Melanie Bien, director, Private Finance

 

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