Pay down debts to protect against interest rate rises

Although it is unlikely the Bank of England will increase interest rates in the near future, it is still wise to prepare.

Mark Bower, managing director at moneymaxim.co.uk, said that while most people have a natural inclination to save, at the moment it is more cost effective to pay off debts.

"For those who do have savings we are recommending they consider reducing their current borrowing levels ahead of any interest rate increase, particularly as the interest that is earned on savings is as low as it is at present," he explained.

However, this does not mean people should do away with having any kind of financial safety net to help should they get hit by an unexpected bill or job loss.

"We always recommend all households retain a reasonable buffer in terms of easily accessible savings to protect them against any short term change in their circumstances," he added.

His comments were echoed by Paula John, editor-in-chief at Your Mortgage, who said that while many people think of paying off their loan and credit card debts when they have spare cash, few consider overpaying their mortgage.

While interest rates are so low, it is more cost effective in the long term to pay off a mortgage as they are most people's biggest monthly commitment.

Although 42 per cent of homeowners are currently contributing to savings, only 21 per cent are making overpayments.

More worryingly however, 31 per cent do not know the interest rate on their mortgage and 25 per cent are unaware if they are allowed to make overpayments.

Ms John said that while overpaying mortgages has become more popular, more people should take advantage of the low interest rates to reduce their debts.

However she conceded that greater levels of education are needed to make people aware of their right to overpay their mortgage.

Moneyextra.com recommends you take independent financial advice before acting on any article

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2012-02-01 17:01:18 © Moneyextra.com