A saver who deposited £3,600 into a regular saver account paying 7% over a year expected £252 in interest but received only £136, according to multiple reports. Martin Lewis said that on the money in a regular saver account, the interest rate is as advertised. However, he explained that the average balance in a regular saver paying £300 per month over a year is £1,800, half the total paid in. Lewis noted that many people mistakenly believe the advertised rate applies to the final balance.
Lewis advised that clearing an overdraft should normally be a financial priority over clearing credit cards. He said overdrafts are almost invariably the worst form of borrowing, with typical rates around 40%. He recommended paying off expensive debt before saving, but also keeping an emergency fund. He gave an example: if you have £1,000 on a credit card at 20% and £1,000 in savings at 4%, you gain 16% by using savings to pay off the card. He added that after paying off a credit card, you can borrow back on it in an emergency, leaving you no worse off.
Lewis compared regular savers, mortgage overpayments, and emergency funds. He said regular savers are not for lump sums but for small monthly amounts, and are suitable for building an emergency fund. Regarding mortgages, Lewis said that if the mortgage rate is higher than the after-tax savings rate, overpaying the mortgage is generally better. He emphasised the importance of an emergency fund of three to six months of bills. He also highlighted specific deals: First Direct pays £175 to switchers and offers a 7% regular saver for a year with up to £300 per month. Zopa offers a regular saver paying 7.1% over a six-month term with a variable rate and a maximum monthly deposit of £300. Principality Building Society offers a regular saver at 7.5% fixed for six months with a maximum monthly deposit of £200.
Lewis discussed overdraft rules and rates after Financial Conduct Authority regulations. He said that the FCA introduced rules from April 2020 requiring banks to charge only an annual interest rate on overdrafts, with no fees. He said overdrafts with most high street banks are locked at 39.9%. He gave an example of clearing a £600 overdraft by paying off £100 per month.