Every pound you overpay earns your mortgage rate, guaranteed and tax-free. Every pound you save earns a savings rate, sometimes taxed, but stays yours to spend when you need it. The right choice depends on which of those matters more to you now.
Compare the two rates
Overpaying saves you interest at your mortgage rate. Saving earns interest at your savings rate, and HMRC taxes that interest once it goes over your Personal Savings Allowance, although interest in a cash ISA is tax-free. If your mortgage costs more than your savings earn after tax, overpaying usually comes out ahead. If your savings earn noticeably more, saving does.
Small overpayments add up over the years. On a £200,000 mortgage at 4.5% over 25 years, the regular payment is £1,111.66. Adding £200 a month clears the mortgage 6 years and 1 month early and cuts your interest bill by £36,280.
Keep an emergency fund first
Money you overpay is hard to get back. Once your lender has it, you can't withdraw it without borrowing again, and a lender may refuse to lend when you need it most, for example after you lose your job. Many guides suggest keeping three to six months of essential spending in easy-access savings before you overpay.
Clear dearer debts first
Credit cards, car finance and personal loans tend to charge more than a mortgage. Paying them off before you overpay saves more interest for every pound.
Check your mortgage terms
Most fixed and discounted deals cap penalty-free overpayments, often at 10% of the balance a year, and charge an early repayment charge above that cap. Your lender also decides whether an overpayment shortens your term or lowers your payment. Our guide to overpayment limits and early repayment charges covers the details.
Weigh the other options
Two alternatives can beat both overpaying and ordinary saving:
- An offset mortgage. Your savings sit in a linked account and reduce the balance your lender charges interest on, yet you can still withdraw them.
- Pension contributions. Tax relief, and any extra your employer adds, can make paying into a pension worth more than overpaying. You can't touch that money until you reach pension age.
Or do a bit of both
You don't have to choose one. Many people build an emergency fund first, then split spare money between overpayments and savings, or overpay in lump sums once their savings reach a target.
This guide gives general information, not personal financial advice. For help with your own situation, speak to a regulated mortgage adviser or MoneyHelper, the free government-backed guidance service. Our independent help page lists other free services.