Switching mortgage vs savings

brassmonkey001

My mortgage balance is £39K and my introductory rate has now ended and switched to 4.74% so I'm looking to switch to another lender.
I have a Santander 123 account which pays 3% on my balance.
I believe I can get another mortgage with a rate of 1.5%.
My question is, should I take some money from my Santander account and use it to reduce the amount I need to borrow i.e. to £35K instead of £39K? Or keep the the borrowed amount at £39K and earn interest off the 123 account instead?

TIA

Elfbert

I would say it depends on your LTV.

I think that below 60% you won't get a better rate. So would moving from owing £39k to £35k bring you over a 'threshold', or not?

And do you have to change lenders? Can you not get a new rate with the same lender? (assuming you're happy with them).

Thrugelmir

brassmonkey001 wrote: »

I believe I can get another mortgage with a rate of 1.5%.

Have you applied?

brassmonkey001

Thanks for the reply, Elfbert.

LTV is below 50% so no threshold triggers.
And I meant a new deal, not necessarily a new lender. I'm just exploring my options before commiting to a new deal.

The thing I can't work out is if it's better reduce the sum borrowed now while I can or to keep my "spare" in my savings accruing interest and pay a lump sum off at a later date?

It's an 18 year mortgage and a lot can change during that time. I'm hoping to pay it off well before the 18 years are up!

AnotherJoe

Its better financially just to accumulate the money in a savings account, as long as the money saved is greater than that paid on the mortgage. Dont forget to include tax, if applicable.

Its also more flexible, which is also a possible downside, in that you may be tempted to spend money earmarked for the mortgage and spend it on something else. That may be necessary, lets say a new boiler, or not, say a cruise.

Emotionally, you may prefer to have paid off more of the mortgage.

You can always do a half way house, save in a high interest account, when you reach a benchmark ( a certain amount, end of the year, whatever) pay that off the mortgage in a chunk, then start saving again. That way you on average have half the money squirreled away for a rainy day fund if need be.

brassmonkey001

So it is essentially as simple as: if savings rate is greater than lending rate then keep the money in savings?
The length of term or amount borrowed doesn't make any difference?

I couldn't work out if borrowing a larger sum over a long period would ultimately mean I would pay out more than I would receive on savings over the full term due to compound interest or not.

Annisele

brassmonkey001 wrote: »

So it is essentially as simple as: if after tax savings rate is greater than lending rate then keep the money in savings?

Almost - but don't forget to take tax into account. The new allowances might mean you pay little to no tax on your savings, but that'll depend on your overall position.

The length of term or amount borrowed doesn't make any difference?

Nope.

I couldn't work out if borrowing a larger sum over a long period would ultimately mean I would pay out more than I would receive on savings over the full term due to compound interest or not.

Don't forget you also get compound interest on the savings part of this.