Should You Overpay Your Mortgage or Put the Money in Savings?

You have £150 a month spare. Sending it to your mortgage feels sensible. So does building up savings. Which one actually leaves you better off is a question with a real answer, and it depends on three things: your mortgage rate, the savings rate you can get, and whether you'd pay tax on the interest.

The short version

Overpaying your mortgage earns you a guaranteed, tax-free return equal to your mortgage rate. Saving earns you the savings rate, minus any tax. Whichever rate is higher after tax wins on the maths. Right now, with mortgage rates typically above savings rates, overpaying usually comes out ahead. But the gap is smaller than most people expect, and there are good reasons to save first anyway.

What overpaying actually does

Every pound you pay off your balance stops interest being charged on it for the rest of the term. There's no account statement showing you the gain, which is why it feels less rewarding than watching savings grow, but the effect compounds in exactly the same way.

Take a £150,000 mortgage at 4.5% with 20 years left. The normal payment is about £949 a month, and you'd pay roughly £77,800 in interest over the term. Overpay £150 a month and the mortgage clears in 16 years instead of 20, with about £17,200 less interest paid. You can check your own figures with our mortgage overpayment calculator.

What saving the same money does

Put that £150 a month into a savings account at 4% instead and after 20 years you'd have deposited £36,000 and earned about £19,000 in interest, for a pot of roughly £55,000.

Hold on. £19,000 of savings interest against £17,200 saved on the mortgage? That looks like saving wins, even at a lower rate. It doesn't, but the reason is worth understanding because it catches a lot of people out.

The comparison above isn't fair. In the overpayment scenario your mortgage finished four years early, so for those last four years you'd have the whole £1,099 a month (the old payment plus the overpayment) free to save. Do that at 4% and you end the 20 years with about £57,100 in the bank. That beats the £55,000 from saving all along, and both routes end mortgage-free on the same day. Overpaying wins by about £2,100.

Tax usually settles it

That £2,100 gap assumes you pay no tax on savings interest. Basic-rate taxpayers get a £1,000 Personal Savings Allowance (£500 for higher rate), and £150 a month compounding for two decades blows through that comfortably in the later years.

If your savings interest were taxed at 20% throughout, the save-instead route drops to about £51,200 while the overpayment route barely moves, because the mortgage saving was never taxable in the first place. The gap widens from £2,100 to roughly £5,000. A cash ISA avoids the tax problem, but ISA rates are often a little lower, which claws back some of the benefit.

The rule of thumb holds: compare your mortgage rate with your after-tax savings rate, and don't forget the "after-tax" part.

When saving is still the right call

The maths above assumes the only goal is ending up with the most money. Real life has other constraints, and there are situations where saving first is clearly right:

• You have no emergency fund. Overpayments generally can't be taken back. If the boiler dies or your income stops, a mortgage you've diligently overpaid won't help you. Most advisers suggest three to six months of essential outgoings in accessible savings before overpaying anything.
• You can genuinely beat your mortgage rate. If you're locked into an old fix at 2% and savings pay 4.5%, saving wins on the numbers even after basic-rate tax. Park the money, then throw the lot at the mortgage when your deal ends, before the new higher rate kicks in.
• You'd breach your overpayment allowance. Most fixed deals allow 10% of the balance per year penalty-free. Early repayment charges of 1% to 5% on the excess will wipe out years of interest savings, so check your allowance before a big lump sum.
• You have more expensive debt. Credit cards and personal loans almost always charge more than your mortgage. Clear those first.

Run your own numbers

Ten minutes with two calculators answers this properly for your situation. Use the mortgage overpayment calculator to see what your spare cash saves in interest and time, then the compound interest calculator to see what the same money grows into at the best savings rate you can find. Compare the two, knock the tax off the savings figure if you'd exceed your allowance, and you have your answer.