Should I overpay my mortgage or save the money instead?
The comparison between mortgage rate and savings rate, the overpayment limits and charges to check first, and the reasons flexibility sometimes beats the arithmetic.
- Difficulty
- intermediate
- Time
- 45 min
- Read
- 3 min
- Safety
- caution
Short answer
Compare your mortgage rate with what savings pay you after tax. Check your lender's annual overpayment allowance and any early repayment charge before doing anything. Overpaying is irreversible unless the lender offers a borrow-back facility, which is why many people keep the money accessible instead.
The arithmetic side of this is straightforward: overpaying saves you the mortgage rate, saving earns you the savings rate, and the higher one wins. What complicates it is that the two are not equivalent in flexibility. Money in a savings account can be used for anything; money paid into a mortgage generally cannot be taken back out.
Safety
Step by step
- Find your current mortgage rate and product end date.The rate applies until the fixed or discounted period ends. The comparison can change entirely at that point, so note the date.
- Check the annual overpayment allowance.Most fixed deals allow overpayment up to a percentage of the balance each year without charge. Going beyond it triggers an early repayment charge that can wipe out the benefit.
- Find the early repayment charge.It is in the mortgage offer, usually as a percentage of the balance reducing over the term. Overpaying beyond the allowance is only sensible when the saving exceeds the charge.
- Compare the mortgage rate with the after-tax savings rate.Savings interest may be taxable depending on your personal savings allowance and tax band. Compare like with like.
- Clear more expensive debt first.Credit cards, overdrafts and car finance almost always carry higher rates than a mortgage. They come first.
- Keep an emergency fund before overpaying.A mortgage overpayment is not accessible in a crisis. Losing income with no savings and a smaller mortgage is a worse position than the reverse.
- Check whether overpaying reduces term or payment.Lenders differ, and some let you choose. Reducing the term saves more interest; reducing the payment improves monthly cash flow. Say which you want.
- Ask whether the lender offers borrow-back.Some products let you draw overpayments back. That removes the flexibility objection almost entirely, so it is worth asking about.
- Consider the effect on loan to value.Getting below a lending threshold can qualify you for a materially better rate at remortgage. A targeted overpayment to reach a band can be worth more than the interest saved.
- Check pension contributions before either.Employer matching and the tax treatment of pension contributions can make them more valuable than both options. This is a good point to take free guidance.
Tips
- Overpaying to cross a loan-to-value threshold before a remortgage can be worth far more than the interest it saves directly.
- Ask the lender whether overpayments reduce the term or the monthly payment, and say which you want — the default is not always the better one.
- Regular small overpayments usually work better than an annual lump sum, because the interest saving starts sooner.
Common mistakes
- Overpaying past the annual allowance — An early repayment charge on the excess can be larger than the interest saved, turning a sensible decision into a loss.
- Overpaying with no emergency fund — The money cannot usually be recovered. A household with a smaller mortgage and no savings is more fragile, not less.
If it doesn't work
You are not sure whether overpayments were applied
Cause: Some lenders hold overpayments in a reserve rather than applying them — Fix: Ask for a statement showing how the payment was applied, and confirm in writing how you want future ones treated.
Savings rates have overtaken your mortgage rate
Cause: You are on an older low fixed rate — Fix: Saving may be better while that rate lasts. Diarise the product end date and reassess then.
You want to overpay but rates are about to change
Cause: The product end date is near — Fix: Overpayment allowances usually reset with a new product, and early repayment charges often fall away between deals. Time it around the switch.
Questions people ask
Does overpaying reduce my monthly payment?
Only if you ask for it to. The default at many lenders is to reduce the term instead, which saves more interest but does not help monthly cash flow.
Is an offset mortgage a way to get both?
An offset links savings to the mortgage so the balance offsets interest while remaining accessible. Rates on offset products are often slightly higher, so it needs comparing on the whole cost.
Where can I get free help with this?
MoneyHelper is free and impartial. For a recommendation on your specific mortgage, a regulated mortgage adviser is the right route.