To overpay your mortgage or to keep cash in the bank – that’s the question. But is there a clear-cut answer? Like most financial decisions, there’s no one-size-fits-all approach. What works best for you depends on your personal circumstances and things like your mortgage rate, how much savings you have and what your long-term financial goals look like.

In this blog, we explore some key questions that might help you decide what’s right for you. Whether you’re thinking about making a mortgage overpayment or building up savings, understanding the pros and cons can help you make more informed choices for your money.

What’s your mortgage interest rate compared to your savings rate?

If there were no other factors to consider, this would be the simplest way to work out which option is best for you.

If your mortgage interest rate is higher than the interest you’re earning on savings, overpaying your mortgage could makes sense. But if your savings rate is higher, keeping money in savings could be a better option.

For example:

  • If you had £10,000 either to save or use for a mortgage overpayment and your savings rate is 3%, you’d earn £300 interest in a year.
  • If your mortgage interest rate is 5%, overpaying with the £10,00 could save you £500 in interest.
  • In this scenario, overpaying your mortgage would leave you £200 better off per year.

However, this is just one factor to consider, and your personal circumstances will play a role in deciding what’s best.

Are you paying tax on your savings interest?

If you’re earning savings interest on savings, it’s worth checking whether it falls within your Personal Savings Allowance (PSA) to avoid paying unexpected tax on it.

If you’re exceeding your PSA, a tax-free savings option like an ISA (which allows up to £20,000 per year tax-free could be worth considering. not earning more than £1,000 in interest, the PSA will likely cover you.

Alternatively, if you’re paying tax on savings interest, overpaying your mortgage might offer better value, as it reduces the interest you’re paying while also reducing the overall capital and loan term.

Personal Savings Allowance (PSA)

  • Basic rate taxpayers

    Basic rate taxpayers can earn up to £1,000 interest tax-free

  • Higher rate taxpayers

    Higher rate taxpayers can earn up to £500 interest tax-free

  • Additional rate taxpayers

    Additional rate taxpayers don’t have a tax-free allowance

Can you overpay your mortgage without penalties?

Before making any mortgage overpayments, it’s important to check your lender’s terms. Some mortgages have limits on how much you can overpay each year without incurring penalties.

For example, Hodge allows up 10% overpayment each year with no penalties. However, this varies by lender, so checking your specific terms is always a good idea.

Do you have access to cash if you need it?

Having accessible savings can be important for financial security. A common recommendation is to have 3–6 months’ worth of essential expenses in an easy-access savings account in case of unexpected events like illness or job loss.

If you put all your spare money into mortgage overpayments, it might be harder to access if you need it later.

Will you be making or lump sum or regular overpayments?

This can impact how much interest you save and how quickly you pay off your mortgage.

  • A one-off lump sum: This immediately reduces your loan balance, meaning interest is calculated on a smaller total amount from that point onwards. If you continue making the same monthly payments, you could shorten your mortgage term and less interest overall.
  • Regular overpayments: Making extra payments each month steadily reduces your balance and the interest paid over time.

For example, overpaying £200 per month on a £250,000 repayment mortgage with a 25-year term at 4.5% interest could save around £38,000 in interest and reduce the term by over five years (depending on your lender’s policies and when interest is calculated).

 

Will your overpayment be used to shorten the term?

When making overpayments, lenders usually offer two options:

  1. Reduce your monthly payments to reflect the new, lower balance.
  2. Keep your payments the same to shorten your mortgage term and reduce the total interest paid.

If becoming mortgage-free sooner is your goal, it could be worth checking whether keeping payments the same is an option for you.

Are you close to remortgaging?

Overpaying your mortgage could reduce your loan-to-value (LTV) ratio, which might help you access better rates when you remortgage. Many lenders base their interest rates on your LTV, so reducing your mortgage balance ahead of a remortgage could be beneficial.

The verdict

There’s no right or wrong answer—it all depends on your personal circumstances, financial goals, and what works best for you.

Exploring these questions can help you make a more informed decision. If you’re unsure, speaking to a professional financial adviser could help, as they can provide tailored guidance based on your situation.

You can find a financial adviser at unbiased.co.uk.

If you’re still exploring savings options, take a look at our savings accounts or contact us.

 

This article is correct at time of publishing and for general information purposes only.