With the European Central Bank widely expected to cut interest rates later this week, the question of how mortgage holders should use their ‘savings’ arises. For many, the joy of savings will be short-lived, or not realised at all, here is why:
1. Government is grabbing all it can. Despite interest rates falling to a record low, savings on mortgage repayments have been eaten up elsewhere. Higher taxes and lower tax exempt thresholds are devouring money that would otherwise be entering the wider economy. Taxes and charges have acted like a space-time ‘black hole’, devouring the best intentions of ‘Super’ Mario!
2. Rate cuts will not be passed along. With approximately 200,000 standard variable rate (SVR) mortgage holders across Ireland, lenders are not obliged to pass on ECB rate reductions. In the past, the majority of banks pocketed rate cuts at one point or another. With most banks now fighting to pass upcoming ECB stress tests, there is little reason to believe they can afford to change their ways.
3. Savers no longer welcome. Talk about punishment for being good! In the latest Government budget, tax on earned interest was raised to a massive 41% which means that almost half of any income earned on interest is taken by Government. For those who have the cash, a primary motivtion has been to protect it…and for the rest of the population, they can only wish.
Should mortgage holders overpay? No! The only group of people that are guaranteed lower repayments are those with tracker mortgages. Despite some calls for tracker mortgage holders to now ‘overpay’ their loans, this is not the best use of their money. Instead, they should set up and build an emergency fund with the savings on their mortgage repayments as an alternative to using more expensive forms of finance such as credit cards, credit union, personal loans and even money lenders.
Frank Conway is the founder of moneywhizz.org, the financial literacy website for students and adults.