Mortgages vs Savings question

jdw2000

Hi all - could someone please explain this:

Apparently, if you have a 1% interest rate on your mortgage then you would need a savings interest rate of 1.3% in order to make it more worthwhile saving than paying off the mortgage.

Why doesn't a 1% savings interest rate income not cancel out a 1% mortgage interest cost? Why must the savings be 1.3%?

The 1.3% figure was given on the calculator on this page: http://www.moneysavingexpert.com/mortgages/mortgages-vs-savings#bbfirst-remortgage-tab1


The following quote was generated when the mortgage rate was set at 1%:

Tool: Should I overpay my mortgage with savings?

From 6 April the new personal savings allowance (PSA) means every basic-rate taxpayer can earn £1,000 interest without paying tax on it (higher rate £500). This is reflected in the calculator below.

Unless your account pays at least 1.3% interest (before tax), it's worth overpaying your mortgage with savings.

Eco_Miser

Because, apart from the first £1000, a basic rate taxpayer has to pay 20% tax on the interest, meaning the net income from 1.3% gross is only 1.04% (1% when rounded to 1 decimal place).

TheShape

You didn't change the tax rate to PSA/Non-taxpayer.

Obviously this is only valid for a non-taxpayer/someone earning within the PSA.

jdw2000

TheShape wrote: »

You didn't change the tax rate to PSA/Non-taxpayer.

Obviously this is only valid for a non-taxpayer/someone earning within the PSA.

OK. So let's say someone has £50,000 of savings paying them 1% interest a year (£500 per year).

And they also have a mortgage which is costing them 1% interest per year (£50,000 of which they could choose to pay off or not, and which costs them £500 per year).


With the 1% interest on each the mortgage costs and the savings income, it makes no difference on a monthly basis whether they pay off the mortgage or not? The income from the savings cancels out the cost for the mortgage borrowing?



(My understanding is that this would only change if the income from savings exceeded £1000 per year, in which case the amount over £1000 would be taxed..... unless you earn over £45K per year, in which case the savings interest is taxed anyway...)

TheShape

jdw2000 wrote: »

OK. So let's say someone has £50,000 of savings paying them 1% interest a year (£500 per year).

And they also have a mortgage which is costing them 1% interest per year (£50,000 of which they could choose to pay off or not, and which costs them £500 per year).


With the 1% interest on each the mortgage costs and the savings income, it makes no difference on a monthly basis whether they pay off the mortgage or not? The income from the savings cancels out the cost for the mortgage borrowing?



(My understanding is that this would only change if the income from savings exceeded £1000 per year, in which case the amount over £1000 would be taxed..... unless you earn over £45K per year, in which case the savings interest is taxed anyway...)

I think your understanding is correct. If the mortgage rate and savings interest rates are the same then either saving or paying the mortgage are equally good options. Personally, I'd be inclined to keep the savings incase a better paying savings option became available and because my mortgage allows unlimited overpayments so that if the mortgage rate was about to rise I could pay my savings into it.

If a basic rate tax payer the sums change on interest earned over the £1000 PSA, higher rate tax payers have a £500 PSA and top rate tax payers have no PSA.