Should your money go towards your mortgage or in a savings account?

With both mortgage and interest rates on the rise, you might be wondering which is the best place for your spare cash (if there’s any left over after rising bills and prices elsewhere).

The simple answer is whichever has the highest interest rate. Putting your money there will be more profitable.

An extra 1% on £5,000 might only be worth £50 a year, but when you factor that in for the length of a mortgage, that will really add up (and compound, too).

The best easy-access savings account right now offers 2.75%, while a one-year fixed is currently at 4.45%, and higher rates of up to 5.12% are available with restrictions.

That’s significantly better than we’ve seen in years. Whether your mortgage rate is better or worse will depend on when you got it. If you’re on a fixed deal agreed before the hikes seen this year, you’ll probably find the interest is lower. In which case the maths say whack it in savings.

But if you’re on a variable rate or have recently moved to a new fix, it could well be that you’re looking at more than 5% on your mortgage, perhaps even 6%. It’s much harder right now to beat that in savings. That’d mean pile more money into the mortgage. Of course, it’s not this simple in practice. Sometimes you’ll even want to put your money where the lower rate is!

For a start, putting money into your mortgage is a lot harder to access in the future. So it makes sense to build up an emergency fund before trying to get mortgage free. Try for at least three months worth of essential costs, if not six. And save more on top if there’s any big spending coming along in the short or medium term.

Beyond this, you need to ensure you’re not going to face a tax bill on interest earned in savings. Basic rate tax payers get a £1,000 Personal Savings Allowance each year, while it’s reduced to £500 for higher rate taxpayers. Above this, though, you’ll have to pay tax (either 20% or 40%).

You’ll probably be OK for now, but larger savings pots at higher rates will eat into the allowance, so you might need to factor in a reduced savings rate when comparing.

And even if the rates suggest it’s better to overpay your mortgage, does your lender even let you do this, and if it does are there restrictions? Some limit you to 10% of the debt each year. There might also be early payment charges if you manage to clear the whole lot early.

Plus, there are the benefits to boosting mortgage payments now as they’ll hopefully get you a better rate when you remortgage, even if the savings rate ‘wins’. That’s because the more equity you have in your home, the better the deals you’ll get access to. So if putting more money in can get you past a ‘Loan-to-value’ threshold, you’ll hopefully save more in the long term.

Sorted? Well, not quite, as there is also a third option which pulls rank over either savings or mortgages. And that’s dealing with debts. If you have things like overdrafts, loans and credit cards, apply the same logic. If the rates are higher than what you’d get with savings or mortgages, you want to focus any existing or new savings into those as a priority.

Best buys: Savings accounts to beat mortgages

These different savings accounts are the highest paying of their kind and are a good, quick way to compare against your mortgage. Make sure you head to becleverwithyourcash.com/savings for details and further rates.

Barclays Blue Rewards

Rate: 5.12% AER

Limits: Requires current account and Blue Rewards, Rainy Day Saver limited to first £5,000

Natwest and RBS Digital

Rate: 5.12% AER

Limits: Requires current account, rate limited toRegular Savers first £1,000, max of £150 saved per month

Kent Reliance one year fix

Rate: 4.45% AER

Limits: Minimum £1,000

Santander eSaver

Rate: 2.75% AER

Limits: Must open before November 1

Andy Webb is an award-winning blogger and podcaster from Be Clever With Your Cash. Follow Andy on Twitter, YouTube and Instagram via @andyclevercash

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