Pay Off Debts With Savings Article Discussion Area

Karmacat

Here's an interesting wrinkle in the whole "pay off your debts with savings" debate. I have a fixed rate loan of 5.7%, which I was going to pay off with savings, but before I did that I asked my accountant to check that the figures made sense. And they don't - its cheaper to keep the loan going. This is because:
- the loan is fixed at 5.7% whereas I can get increasingly higher rates for mysavings, which are in an ISA in any case.
- I get tax relief on the loan interest payments, because they relate to a buy to let investment in France.

wertyjmnb

MSE_Archna wrote: »

This thread is specifically to discuss the content of the

Pay Off Debts With Savings Article

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The analysis understates the case -

Situation B: After a year he has to pay £5,000 in an emergency roof fix



· Do nothing. Johnny uses the savings for the emergency. This leaves him with %4 interest = £200 savings and £5,000 of credit card debt at 18%.

· Pay off debts with savings. Johnny has £700 savings so he has to borrow £4,300 on his credit cards. This leaves him with no savings and £4,300 debt on his credit card at 18%.



This means, Johnny is £500 better off in situation B, if he paid off debt with savings the year before.

MORPH3US

Hi guys, very interesting article...

I currently have about £4k stashed away in ISA's..

My g/f and I both need new cars and are looking at getting loans for about £7k each @ 6.1%

Would I be better using the ISA cash and getting less loan? I should add in here that the £4k is our rainy day fund.

Last year we brought a house with a 100% mortgage for £125k and are overpaying the maximum 20% a month, but we don't have any insurances associated with mortgages like illness / loss of job etc... So if the worst came to the worst, we could cancel back the overpayments taking the mortgage down to about £700 per month and that means the £4000 would last us about 5 months of mortgage.

Any thoughts / advice?

M

jonoone

Have debts and savings.i have aquestion.In want to pay off credit card debts of 40000 from savings asap. savings are in stocks and shares.How would I workout any cap gains liability on shares which I sold.?

Tralf

Some debt is unavoidable. Most of us need to have a mortgage that is paid off over many years in order to buy a house - and that mortgage is a long-term debt.

Being aware of the "interest margin" issue, I chose to take out an offset mortgage. In that type of mortgage, any money I have in the bank (in savings accounts and, indeed, in my current account) is offset against my mortgage debt.

For instance, if my outstanding mortgage is £50,000 and I have £10,000 in my bank accounts, then the interest I pay each month on the mortgage is the interest only on the difference between those two figures, i.e. £40,000.

This means that the money I have in my bank accounts effectively earns interest at the rate at which I am borrowing, rather than at a lower rate for savings. AND the interest I earn that way (which reduces the mortgage outstanding balance each month) is TAX FREE.

Another advantage of this arrangement is that it solves the "Emergency Money" problem. I have full and instant access to the money that is in my bank accounts.

Now on to the question.

In actual fact, the money I have in my bank accounts exceeds the maximum that is protected by the government for investments in any one institution. Does anyone know what would happen if my bank goes under? Would I only get back the "protected" portion of my savings, or would the whole of the arrangment be "netted off", so that I would only owe the bank the difference between my outstanding mortgage and my savings?

I am just wondering what the rules are on this (but thought I would also use this as a chance to mention off-set mortgages which I think are the answer to the "should I pay off my debt or build my savings" question).

Karmacat

I don't know the answer to your question about protection, sorry, but in relation to offset, there is another issue - that often the rate of interest you pay is higher than with another form of mortgage - not always, but often.

Izzi3008

Hi All,
I'm a new poster as well but have been using the Money Saving site for a while. I've read through all the posts on this forum and none have yet answered my question... My partner and I have £8K debt in a personal loan, and about £40K in savings.

We are keeping the savings for a house deposit (we are currently renting). We are hoping that by using about £30K deposit on a house of perhaps £120K we can get a better mortgage and have lower monthly payments. This is important as we're moving to an area where the jobs market isn't very strong and planning a family, so our incomes may be a bit irregular. Also we have had some credit problems (refused one mortgage but offered another last June) so feel we need the best chance of getting a good mortgage, particularly in current climate.

However reading all this and thinking about the rate of interest on our loan (about 6-7% I think) I'm wondering if we should in fact pay it off and have a smaller deposit?

Any advice most welcome!!

Karmacat

Hello Izzi3008

Welcome to the forum - Martin's regular advice is to pay off debts with savings, thats a standard. This is the issue of this thread - you'll find it refers to an article of Martin's.

In your situation, you're referring to a weak jobs market, planning a family, credit problems and debts.... in one word, phew! No one can tell you what to do - but read through what Martin says about it, see other areas of this board - Up Your Income, and Martin's article about Boosting Income, post a Statement of Affairs (look at the beginnings of people's threads, I'm rubbish for posting links, I'm afraid).

Roughly, see if you can get your outgoings right down low. Then get in any extra money you can, save as much as you can, and then, if its still right for you, go for it! Doing your SOA will help get your outgoings down.

Good luck!

Izzi3008

Hi Karmacat, thanks for your message. Good point that I did bring up quite a lot of factors at once!

We are now on our way to getting a mortgage and our first house, and were advised by our mortgage broker (London&Country, thanks to MSE for the recommendation) that it may be a good idea to pay off the loan with our deposit, so that's what we're doing. The loan is at 7% over about 4 years, and the mortgage at about 5% over 25 years so I'm not quite sure which would actually cost us more but it feels good to have all the debt in one place at least!

Izzi3008

Hi Karmacat, thanks for your message. Good point that I did bring up quite a lot of factors at once!

We are now on our way to getting a mortgage and our first house, and were advised by our mortgage broker (London&Country, thanks to MSE for the recommendation) that it may be a good idea to pay off the loan with our deposit, so that's what we're doing. The loan is at 7% over about 4 years, and the mortgage at about 5% over 25 years so I'm not quite sure which would actually cost us more but it feels good to have all the debt in one place at least!