Should I Overpay My Mortgage, or Is It Better to Save Money Elsewhere?

Our latest guide looks at the pros and cons of mortgage overpayments compared to other saving options, helping you decide what works best for your circumstances.

What Does Overpaying a Mortgage Mean?

Mortgage overpayments involve paying more than your required monthly payment. You can do this either by:

• Regular monthly overpayments - paying a bit extra every month
• Lump sum overpayments - paying a larger one-off amount

Most lenders allow you to overpay up to 10% of your mortgage balance each year without penalties if you're in a fixed-rate deal. Some flexible or tracker mortgages have even more generous terms.

The Benefits of Overpaying

• Save interest: You'll pay less interest overall, especially early in the mortgage when interest makes up a larger part of your payment
• Pay off your mortgage faster: Reducing the term can free up your income sooner and give long-term peace of mind
• Guaranteed return: Overpaying is a risk-free way to 'earn' what your mortgage interest rate would have cost you
• Psychological benefit: Less debt can feel freeing and give you greater financial security

Downsides of Overpaying

• Less liquidity: Once you pay it into your mortgage, you can't easily access that money again
• Possible early repayment charges (ERCs): Overpaying beyond your lender's limit may trigger penalties
• May not beat inflation: If your mortgage rate is low, the money might grow more elsewhere over time
• Missed investment opportunity: Long-term investments could yield better returns than the interest you're saving

Compare to Saving - Which Is Better?

The key question is whether overpaying your mortgage offers a better return than saving or investing the money elsewhere. Here's how they stack up:

1. Compare Interest Rates

Suppose your mortgage rate is 4.5% - overpaying gives a guaranteed 4.5% 'return' by reducing interest owed. If a savings account only offers 3%, you're better off overpaying (ignoring tax for now).

2. Emergency Funds Take Priority

Before overpaying your mortgage, ensure you've got an emergency fund - ideally 3 to 6 months' expenses. Unlike a savings account, you can't quickly pull equity out of your house if your boiler breaks or you lose your job.

3. Consider ISA Allowances

If you've not used your annual ISA allowance, saving into a Cash or Stocks and Shares ISA could offer tax-free growth, especially for long-term savers. Some people use ISAs for 5-10 years, then overpay their mortgage in bulk.

4. Investment Potential

If you have a longer time horizon and are comfortable with risk, investing in a diversified fund could potentially outperform your mortgage rate. Over the past 10 years, average stock market returns have often exceeded 5-6%, although this is not guaranteed.

Who Should Consider Overpaying?

• You have no unsecured debt and a stable income
• You've already built an emergency savings pot
• You're nearing the end of your mortgage term or want to retire early
• You prefer guaranteed savings over market volatility

When It's Better to Save or Invest

• You don't have 3-6 months' expenses saved yet
• You have higher-interest debts (like credit cards or personal loans)
• Your mortgage rate is low, and savings/investments offer better returns
• You might need access to the cash in the short or medium term

Tax and Mortgage Overpayments

Mortgage overpayments don't create a tax burden, unlike savings or investments that may be subject to income tax or capital gains. However, if you're a higher-rate taxpayer, ISAs and pensions can still be very tax-efficient and worth considering alongside or before overpayments.

How to Make Overpayments

Speak to your lender to check:

• Your overpayment allowance (usually 10% of the balance per year during a fixed deal)
• Whether overpayments reduce the term or the monthly payment (you can often choose)
• How to make one-off or regular overpayments (online, bank transfer, or direct debit)

Balance Your Priorities

There's no universal answer - the best choice depends on your financial goals, risk appetite and interest rates. For many, a hybrid approach works well: building an emergency fund, contributing to a pension or ISA, and then using any remaining funds to overpay the mortgage.

Whichever path you choose, make sure it fits your long-term plans. Reducing debt is never a bad thing, but neither is growing your savings in the right way.

Looking for advice on mortgages, savings, or long-term property planning? Farrell Heyworth can help you explore smarter financial decisions through expert guidance and trusted local insight. Whether you're buying, selling or planning your future, our team is here to support you.