Many of us will need every penny of the savings we will make on our mortgages after the 1.5% interest rate cut just to get through the month.
Then there are others of us that were coping financially before the unexpected windfall, and in theory, this is money we have spare.
For many of us on tracker rates and some of us on our lenders' standard variable rates, the rate cut offers a considerable monthly saving.
On an average mortgage of £150,000 the interest rate cut would give a household on a tracker mortgage an extra £120 a month.
For those of you paying off an interest only mortgage the figure is even higher at nearly £190.
It’s not surprising to see many of us letting this spare money disappear into your household budget, so now is the time to do something more useful with it. This money could help protect your family against the recession, take a few years off your mortgage or provide for your children in the future.
The 10 tips below aren’t necessarily for everyone and they apply to varying financial circumstances, but they could help you in the difficult times ahead.
1. Pay off any debt you can that is not your mortgage
When you have any spare cash, it is vital you pay off the most expensive debt first. So if you have credit card debt that is not on a 0% deal, or you have an expensive loan, this should be the first place to put your spare money, if you can.
With credit card debt, this is a simple decision since there are no redemption penalties when you pay the money back.
If you put that extra £120 a month in a savings account paying 4% you would have nearly £1600 at the end of the year. However, if you throw that same money at your credit card debt you could save thousands in interest.
For example £5,000 debt on a card with a 17.2% APR (which is the average) will cost you £9,614 in interest and take 44 years to pay off if you just pay the minimum repayment every month. However, putting £120 a month into paying off this debt will have it cleared within 5 years and cost you £2,340 in interest.
The ideal scenario with credit card debt would be to transfer it to a 0% rate while you pay it off. With a 0% rate you could clear the same debt in three years without paying any extra interest.
The exception to the 'pay off debts with savings' rule is if you have loans with hefty redemption penalties. In this case it is worth checking whether you would be better off putting the £120 extra a month in a high interest account and then paying the loan off from this account gradually.
2. Overpay your mortgage
This might sound boring but overpaying your mortgage with the extra money means you could get very significant savings in the long term, as well as possibly allowing you to get better mortgage deals in future.
Most tracker mortgages will allow you to overpay your mortgage by a specific amount; either an extra £500 a month or 10% of the balance every year without redemption penalties.
Use this to reduce your mortgage term and you could be very grateful later. Over a 25-year period, the maths on mortgage overpayments certainly stacks up. If you have a 25-year mortgage of £150,000 and a tracker deal at 0.99% above the base rate, you could shave five years off your mortgage repayments, and save nearly £20,000 over the term.
If you do plan to overpay, it is worth checking with your mortgage lender as they have tightened their criteria on giving out credit. It is worth checking whether you can get the overpayment money back from your lender if you need it in a hurry, otherwise you could be left without the savings that you need.
3. Start a regular savings account
Although interest rates have fallen, some of the best remaining savings rates are reserved for those of you willing save regularly. Even more attractively, some banks are offering fixed rates on their regular savings, meaning that your money will not suffer from falling interest rates.
Top of the best buy tables is Abbey's Super Fixed Rate Monthly Saver, which pays 10% over 12 months. Other high paying accounts include Norwich & Peterborough's Gold Savings Account paying 8%.
By saving £120 a year in the Abbey account you would end up with £1,501, making yourself £67 in savings as a basic-rate taxpayer. Saving the same amount at a more realistic long-term rate of 4% would leave you with £7,808 in savings, earning £608.19 in interest.
Another option is ICICI Bank's online HiSAVE Fixed Rate Account giving you a rate of 5.75% in the first year on a minimum deposit of £1,000
4. Drip feed it into investments
The stock market has taken a pounding over recent months, and whether you want to dip a toe into its choppy waters is entirely up to you. However, experts continually advise that the best way to take advantage of a market downturn is to regularly put money into a fund or into stocks that you like, rather than trying to guess the bottom of the market.
Investing in equity or bond funds needn't involve a vast outlay. Adrian Lowcock, at financial information service Bestinvest, said that you can pay as little as £50 a month into your investment, while £120 a month would soon add up.
"If you haven't yet taken out an equities Isa you would be able to invest this money tax free," he said. Mr Lowcock suggested tapping into corporate bond funds such as Invesco Perpetual's corporate bond fund or Fidelity's Moneybuilder Income Fund. "You can take advantage of low interest rates and put the money into something that is yielding 6% or 7%" he said. "For the longer term, there are also equities that are looking cheap."
5. Take out payment protection insurance
If you fear that if you lose your job you could also lose your home, your mortgage windfall could buy you some peace of mind.
Simon Burgess, from redundancy insurance specialist British Insurance, said it would cost £34 a month to insure £1,000 worth of mortgage payments for 12 months in the event of losing your job. The policy will pay out if you are unemployed for 30 days or more, and there is no excess.
However, he warned that you should not leave it until it is too late to take out cover. "It's like fire insurance," he said. "The time to take it out is not when the house is burning down. Now is the time to take out unemployment insurance."
6. Save for your children's future
Thanks to Gordon Brown, every child born since 2002 has their very own trust fund, started off with a £250 voucher from the Government. The vast majority of these are stakeholder funds, which are invested in equities.
Your child's account may have had a torrid time over the past few months (thanks to the ever changing interest rate), but the principle of regular savings adding up over the long term still applies. Over nearly all 18-year periods in history, investing in equities has outperformed money in a deposit account, and since your child cannot access this money until they are 18 there is plenty of time to take a long-term view.
Child Trust Funds are tax free and grandparents and other interested adults can also invest in them on the child's behalf. The maximum amount that can be invested per month is £100. Figures from trust fund provider Family Investments show that if this is invested over an 18-year period it should generate around £35,750; that’s quite a good start in life for any teenager!
This figure allows for the initial £250 voucher from the Government and assumes that investments grow at 6.75% a year over a full 18-year term with contributions starting at age 0 and with an annual charge of 1.5%.
7. Save into a pension
You could also use the rate cut windfall to add to your pension contributions; another way to keep your money away from the taxman.
Saving £120 a month into a pension is unlikely to produce life-changing amounts of money for a 55-year-old starting to save now (although it will make a difference), but for a 35-year-old the difference could be more impressive. According to Legal & General's stakeholder pension calculators, a 35-year-old man putting £120 a month into a pension could end up with an income of £212 a month in retirement at 65.
8. Buy a health cashplan
Health cashplans are different from more expensive health insurance, but they could be a good buy if you regularly pay to have your eyes tested and to go to the dentist. They will also provide backup for other more expensive procedures.
With a cashplan, you arrange for the treatment yourself and pay the money. Then you send the plan provider a claim form and your receipt and it will pay you back some or all of the cost for that treatment. The amount you're allowed to claim back depends on which of a provider's policies you choose. The more expensive a policy, the more you can reclaim each year.
Policies such as Hospital Saturday, from Bolton & District, can provide cover for an individual from £6.93 a month. This will help you to pay for prescriptions, spectacles and regular medical expenses (though it does not cover pre-existing conditions). If you went for the full number of recommended opticians' and dentists' appointments every year that would more than pay you back, and it also provides a safety net for more expensive procedures.
9. Prepay your children's school fees
If you are planning to pay for private education for your child or grandchild, it pays to start early. You could put your extra money into a savings plan to help with costs in the future.
If your child is already in a private school, many will let you pay the fees in advance, which could also insulate you against later rises in fees.
10. Spend the lot to stimulate the economy
Naturally, this is Gordon Brown's preferred option!
That £120 a month extra could give the economy a much-needed boost if you spent it on the high street. After all, a couple of lattes and an expensive meal out suddenly seem like the right thing to do (and it might make you feel better in the short term!).
On the other hand, the options above are likely to benefit your family better if times really get tough.
And try as you might, you can't save the economy single-handed…
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