Mortgage overpayment vs saving: which is better for you?
If you have spare money each month, you can put it towards your mortgage or into savings. Both are sensible. The right choice depends mainly on interest rates and how much flexibility you need.
What overpaying actually saves
Take a £200,000 repayment mortgage at 4.5% over 25 years. The normal payment is about £1,112 a month, and you'd pay around £133,500 in interest over the term.
Overpay £100 a month and the mortgage is cleared in about 21½ years instead of 25. You'd pay around £112,400 in interest, a saving of roughly £21,000, for £25,800 of overpayments in total.
The simple rule
Compare your mortgage rate with what you'd earn on savings after tax.
- If your mortgage rate is higher, overpaying usually wins, because every pound you overpay "earns" your mortgage rate, tax-free and guaranteed.
- If your savings rate after tax is higher, saving usually wins, and you keep access to the money.
Basic rate taxpayers get £1,000 of savings interest tax-free each year, higher rate taxpayers £500, and interest in a cash ISA is always tax-free.
Why many people do both
Money paid into your mortgage is hard to get back out. Before overpaying, it's usually wise to have an emergency fund of three to six months' spending in easy-access savings, and to clear any more expensive debt such as credit cards or car finance.
Check your overpayment limit
Most fixed-rate deals let you overpay up to 10% of the balance each year without a penalty. Go over that and you could pay an early repayment charge, often 1% to 5% of the excess. Check your mortgage offer or ask your lender.
Lower payments or shorter term?
When you overpay, some lenders reduce your monthly payment and others shorten the term. Shortening the term saves more interest, so if you want that, tell your lender.
Run your own comparison
Use the mortgage calculator to see your current payments, and the savings calculator to see what the same money would grow to in a savings account.