Should you save or overpay your mortgage?

Is it better to save money or overpay a mortgage? Overpaying increases your equity and can mean paying less interest and reducing the term of your loan.

Key points

  • Overpaying your mortgage may prove more valuable than keeping money in savings, but do your research
  • A rainy-day savings pot can be invaluable in times of emergency
  • If you have other debt it's likely to be costing you comparatively more than a mortgage, so prioritise that first
  • When overpaying, look out for early repayment charges, think about ensuring you're reducing the length of the debt and consider the timing of overpayments

A general maxim of financial planning is that you'll pay more in interest on your debt than you'll make from interest on your savings and investments.

This means it's likely to be worth paying down any debt before thinking about serious saving.

This calculation is not always so straightforward when it comes to mortgages, notably because the debt tends to be so big and long-term and you need to factor in things such as changes in property value.

Paying down your mortgage debt as quickly as possible can be a smart move, though.

Even when mortgage interest rates are low, it's likely that savings interest rates will also be low and it's worth thinking about whether using your funds to clear the debt on your property will be beneficial.

You need to be aware that some mortgage providers levy early repayment charges for anything above your agreed monthly payment.

But many will allow borrowers to repay an additional proportion - typically up to 10% of their mortgage - each year.How to cut the cost of your mortgage

"Overpaying can be a great way to make long-term savings on your mortgage, helping to reduce the amount of interest you pay and the term of your loan," said's Matt Sanders.

"It's all about working out what interest you stand to gain by leaving the money in a savings account versus the interest you'll save by reducing your mortgage balance."

Overpaying also sometimes allows flexibility, for instance if you want to underpay for a few months in the future, your lender might allow this if you've overpaid in the past.

Clearing other debts before overpaying a mortgage

Before considering overpaying your mortgage, it's worth thinking about other, more expensive debt you may be holding.

For example, if you have a credit card, overdraft and/or loan with a higher APR than your mortgage, try to prioritise repaying that first.

How to work out if you're better off overpaying or saving

After you've cleared more expensive debt, compare repaying your mortgage to the potential interest you could make by investing your money in a savings account.

The effect of overpaying

  • If you have a mortgage of £125,000 and are paying back £500 a month over a 25-year term, increasing your repayment by £100 a month could mean saving over £5,000 in interest and paying off your mortgage almost five years sooner

Basically, if your mortgage rate's higher than your saving rate (after tax), you'll save more money by overpaying your mortgage than you'd earn by putting the money in savings.

For instance, if your mortgage interest rate is 3% APR but you can only get 2% AER interest after tax from savings, you'll be better off overpaying than saving.

If saving is more profitable for you than overpaying your mortgage, it's still worth thinking about making your funds accessible so that you could make a lump-sum repayment to pay off some of your mortgage the next time you come to remortgage.

Other things to consider before overpaying

Early repayment charges

"Make sure you check that your mortgage provider allows you to overpay and that you won't be subject to any charges," said Sanders.

"Many providers will restrict the amount you're allowed to overpay by a percentage of the outstanding balance each year."A piggy bank wearing a pair of sunglasses

This is typically 10% of the outstanding balance each year, but can vary from lender to lender.

This 10% could come from monthly overpayments or a single lump sum - if you're making regular, smaller overpayments, make sure you don't exceed the penalty-free limit.

If you exceed the amount you're allowed to overpay, you might have to pay early repayment charges on the extra money repaid.

Keep some money spare

Although some providers allow a bit of flexibility with underpayments and repayment holidays once you've overpaid, many don't, so once you've made your payment, the money becomes inaccessible.

Do you have a healthy rainy-day fund? It's a good idea to always keep a bit of money aside for emergencies like a broken boiler or car repairs.


  • Clearing expensive debts - like loans and credit cards - should be prioritised as these are likely to cost you more in interest

Make sure you'd be a in a comfortable position if, for example, you were to lose your job - three to six months' worth of bill and mortgage payments is a useful amount to have saved.

You might want to build up this amount before overpaying your mortgage.

Benefits of overpaying your mortgage

Lower payments

If your mortgage provider keeps the term of your mortgage the same when you overpay, you'll have lower monthly payments, giving you more disposable cash each month.

Be aware that this won't actually reduce the interest cost of your mortgage, though.

Shorter term

If you ask your mortgage provider to keep your monthly payments the same while you overpay your mortgage you'll reap the most benefits, as this will allow you to reduce the term instead and pay your mortgage off sooner.

Overpaying in this way will mean paying less interest, which will reduce the cost of your loan overall.Credit cards and calculator


Overpaying on your mortgage can, in some cases, give increased flexibility by giving you the option to underpay in the future.

Your overpayment could cover your monthly payments for a number of months if you want to take a payment holiday, or you could underpay by reducing your monthly payment.

Not all providers will offer such a facility, though, so check whether these features apply to your mortgage before overpaying.

Timing of overpayments

Mortgages differ in the way they calculate the interest you owe - daily, monthly, quarterly or annually.

Most calculate interest daily, which means you'll benefit from interest savings immediately when you overpay.

Check your mortgage to find out when interest is calculated before overpaying, as there's no point making your overpayment until just before interest is calculated.

For instance, if interest is calculated annually on your mortgage in December but you make an overpayment in January, your money will have no effect on your mortgage balance for a whole year.

You could have instead put it in a high-interest savings account for a year, before making your overpayment in December.

"You should make the payment as close to the calculation date as possible," said Sanders.

"That way, you can sit the savings in an Isa or regular savings account to gain the interest then, at the last minute, transfer it in time to be counted in your interest calculation.

"This, however, only really applies to monthly, quarterly or annual interest calculations - most mortgages are daily calculations these days."

By Emily Bater