Should You Overpay Your Mortgage or Save Instead?

For many homeowners, having a little extra money left at the end of the month raises an important question: is it better to put it towards your mortgage or build your savings?

With mortgage rates higher than they were a few years ago, and savings accounts offering more competitive returns, the answer isn’t always straightforward. While overpaying your mortgage can reduce the amount of interest you pay over time, keeping money in savings can provide greater flexibility and financial security.

Rather than there being one correct approach, the decision often comes down to your individual circumstances, financial priorities and the terms of your mortgage.

What does it mean to overpay your mortgage?

A mortgage overpayment is any payment made above your required monthly mortgage payment. Depending on your lender, this could be a regular monthly overpayment or a one-off lump sum.

Many lenders allow borrowers to overpay by up to 10% of their outstanding mortgage balance each year without charging an early repayment charge (ERC), although this can vary between lenders and mortgage products. It’s always worth checking your mortgage terms before making additional payments.

The potential benefits of overpaying

One of the main reasons borrowers choose to overpay is to reduce the overall interest paid over the life of the mortgage.

Because interest is usually calculated on the outstanding loan balance, reducing that balance sooner may mean less interest accrues in future months and years.

Depending on the size of the overpayments, borrowers may also be able to:

• Reduce the length of their mortgage term.
• Build equity in their property more quickly.
• Lower their loan-to-value (LTV) ratio ahead of a future remortgage.
• Potentially qualify for more competitive mortgage rates when their current deal ends.

For some homeowners, becoming mortgage-free sooner also offers peace of mind, which can be an important consideration alongside the financial benefits.

Get In Touch

Why building savings can also make sense

While paying down debt can be appealing, keeping money accessible has its own advantages.

Savings can act as an emergency fund if unexpected expenses arise, such as household repairs, redundancy or changes in income. Once money has been used to reduce a mortgage balance, it generally can’t be accessed again unless additional borrowing is available and approved.

Interest rates on savings accounts have also been more competitive in recent years than many borrowers had become accustomed to. Depending on the interest rate on both the mortgage and the savings account, some people may wish to compare the potential return on savings against the interest being paid on their mortgage.

It’s worth remembering that savings interest may be taxable above your Personal Savings Allowance, depending on your circumstances. Always seek professional tax advice to learn more.

The role of offset mortgages

For borrowers with an offset mortgage, the decision can look slightly different.

Instead of earning interest on savings, money held in a linked savings account is used to reduce the balance on which mortgage interest is calculated.

For example, if someone has a mortgage balance of £250,000 and £30,000 in linked savings, they may only pay mortgage interest on £220,000. The savings remain accessible, while still reducing the amount of mortgage interest charged.

Not every lender offers offset mortgages, and they aren’t suitable for everyone, but they can provide an alternative for borrowers who value flexibility alongside reducing mortgage interest. If you’re interested to learn more, get in touch with our team.

Comparing the numbers

Whether overpaying or saving is likely to have the greater financial benefit often depends on several factors, including:

• Your mortgage interest rate.
• The interest available on your savings.
• Whether savings interest is taxable.
• Any early repayment charges or overpayment limits.
• Your future plans, such as moving home or remortgaging.

Looking at these factors together may provide a clearer picture than focusing on one figure alone.

Don’t overlook your emergency fund

Before making regular mortgage overpayments, many people choose to consider whether they have enough accessible savings to cover unexpected costs.

Having money set aside for emergencies may help reduce the need to rely on credit cards or loans if circumstances change.

The amount someone feels comfortable keeping in emergency savings will vary depending on their employment, household commitments and financial situation.

It’s not always an either-or decision

Some homeowners choose to take a balanced approach by splitting any surplus income between mortgage overpayments and savings.

For example, someone with an additional £200 each month may decide to put £100 towards reducing their mortgage balance while adding the remaining £100 to their savings.

This approach may allow borrowers to make progress towards becoming mortgage-free while continuing to build a financial safety net.

Questions you may want to consider

If you’re weighing up your options, it may be helpful to think about:

• Do you already have an emergency fund?
• Are there any early repayment charges or overpayment limits on your mortgage?
• How does your mortgage interest rate compare with current savings rates?
• Are you planning to remortgage or move home in the near future?
• Would you prefer the reassurance of reducing debt or having easier access to your money if your circumstances changed?

The answers will differ from one borrower to another, which is why the most suitable approach isn’t necessarily the same for everyone.

Get In Touch

The bottom line

Choosing between overpaying your mortgage and building your savings isn’t simply about finding the highest interest rate or the quickest way to reduce debt. It’s about understanding how each option fits with your wider financial circumstances and future plans.

For some borrowers, reducing their mortgage balance may be the priority. For others, maintaining accessible savings could provide greater financial resilience. Some may even find that a combination of both better suits their needs.

If you’re unsure which approach aligns with your circumstances, you may wish to speak with a qualified mortgage adviser at Exe Mortgages who can help explain the options available and how they relate to your individual situation.