If you have some money left over after paying your bills, you may be wondering what to do with it.
Should you put the extra money towards your mortgage and buy online lasix reduce what you owe? Or would you be better off keeping it in a savings account where you can access it when you need it?
For UK homeowners, there is no single answer that works for everyone. Your mortgage rate, savings rate, emergency fund, other debts and mortgage terms can all affect the decision.
The good news is that you do not have to guess. Looking at a few key numbers and your wider financial situation can help you decide whether saving, overpaying your mortgage or doing a combination of both makes sense for you.
What is the difference between overpaying your mortgage and saving?
Mortgage overpayment means paying more than your required monthly mortgage payment. The additional money can reduce your outstanding mortgage balance, depending on your lender’s terms.
Saving means keeping the money in a savings account or another suitable savings product where it can potentially earn interest while remaining available for future use.
The two options have different benefits.
An overpayment could reduce the amount of mortgage interest you pay over time. Savings can give you interest on your money while keeping it accessible, depending on the type of account you choose.
So the question is not simply which option sounds better. You need to compare what each could do for your money.
MORTGAGE OVERPAYMENT VS SAVING COMPARISON TABLE
| Option | Potential benefit | What to consider |
| Mortgage overpayment | Can reduce your mortgage balance and potentially reduce future interest | Money may be harder to access and charges or overpayment limits may apply |
| Savings | Keeps money available for future expenses while potentially earning interest | Savings rates can change and tax may affect the interest you keep |
| Combination of both | Lets you keep some accessible savings while reducing your mortgage balance | You need to decide how much to allocate to each |
There is no universal split that works for everyone. Your mortgage terms, savings rate, emergency fund and wider financial situation all matter.
Start with your emergency fund
Before deciding whether to overpay your mortgage, look at how much accessible savings you already have.
An emergency fund can help cover unexpected expenses such as a major household repair, an urgent bill or a period when your income falls.
Money paid into your mortgage is generally less accessible than money sitting in an easy-access savings account. If you use all your spare cash to reduce your mortgage and then face an unexpected expense, you may need to find another way to pay for it.
If you do not have much set aside yet, building some accessible savings may be worth considering before making large mortgage overpayments.
If you are working with a tight budget, our guide on how to build an emergency fund on a low income in the UK can help you look at ways to start putting money aside.
Compare your mortgage rate with your savings rate
One of the most important numbers to compare is your mortgage interest rate against the interest rate you could earn on your savings.
For example, imagine your mortgage interest rate is 4% and you have £10,000 of spare money.
Putting that £10,000 towards the mortgage could reduce the amount on which mortgage interest is charged.
Keeping the £10,000 in a savings account could allow you to earn interest on the money instead.
However, the comparison is not always as simple as saying one rate is higher than the other.
Savings interest may be affected by tax depending on your circumstances. Savings rates can also change, particularly if you are using an account with a variable rate or a temporary introductory rate.
Your mortgage rate may also change when your current deal ends.
For this reason, look at the actual rates, terms and viagra ohne rezept bekommen potential returns rather than relying on a general rule.
What happens when you overpay your mortgage?
When you make a mortgage overpayment, the money is used to reduce what you owe, subject to your mortgage terms.
A smaller mortgage balance can mean less interest is charged over time.
For example, if you owe £200,000 and make a £5,000 overpayment, your mortgage balance could fall to £195,000 if the full payment is applied to the balance.
The effect on your future payments and mortgage term depends on your mortgage and how your lender handles overpayments.
Some lenders may allow you to maintain your existing monthly payment and potentially shorten the time it takes to repay the mortgage. Others may recalculate your payments.
Ask your lender what will happen before making a significant overpayment.
What happens if you keep the money in savings?
If you keep your spare money in a savings account, it remains available for future use, depending on the account’s withdrawal conditions.
You may earn interest while the money is there. This can be useful if you expect to need the money for a large expense, want to build an emergency fund or simply prefer having a financial cushion that you can access.
The trade-off is that your mortgage balance remains higher than it would have been if you had used the money to overpay.
You therefore need to weigh the interest you could earn against the mortgage interest you could potentially avoid.
Don’t forget about early repayment charges
Before making a mortgage overpayment, check whether your lender allows you to do so without a charge.
Some mortgage deals have an annual overpayment allowance. Going above that allowance could result in an early repayment charge, depending on the terms of your mortgage.
The rules vary between mortgage products, so do not assume that an overpayment is automatically free.
Check your mortgage agreement or contact your lender to find out:
- how much you can overpay
- whether there is an annual allowance
- whether the allowance applies to regular payments, lump sums or both
- when an early repayment charge could apply
- how an overpayment will affect your mortgage term or monthly payments
If you are considering putting a large amount of money into your mortgage, check these details first.
MoneyHelper also recommends checking your mortgage terms and understanding any limits or charges before making overpayments. You can read its guidance on mortgage overpayments for more information.
What if your savings rate is higher than your mortgage rate?
This is one situation where keeping some or all of your spare money in savings may be worth considering.
Suppose your mortgage rate is 3.5% while you can earn 4% on a suitable savings account.
On the surface, keeping your money in savings could produce a higher return than the interest you might save through a mortgage overpayment.
But you still need to consider tax, account conditions and how long the savings rate will remain available.
You also need to consider what happens when either rate changes.
A savings account paying a higher rate today may not continue to do so indefinitely, while a fixed mortgage rate may remain unchanged until the end of its deal period.
The figures need to be checked based on your own circumstances.
What if your mortgage rate is higher than your savings rate?
The calculation can look different when your mortgage rate is higher. If your mortgage costs more in interest than you can earn on an appropriate savings account, reducing the mortgage balance could potentially save more interest than the savings account earns.
For instance, if your mortgage rate is 5% and your savings account pays 3.5%, there is a difference between the two rates. That does not automatically mean you should put every penny into the mortgage.
You may still need accessible savings, and you should check whether an overpayment charge applies. The comparison is therefore about more than two percentages.
For example, if you have £10,000 and your mortgage rate is 5%, a simple comparison starts with £500 of mortgage interest over a year. If the same £10,000 earned 3.5% in savings, that would be £350 in interest before taking account of tax, changes in rates or account conditions.
This is only a simple illustration. Your actual mortgage interest and savings return will depend on how your mortgage and savings account calculate interest and on how long the money remains in each.
Should you pay off expensive debt first?
Your mortgage should not be considered separately from your other borrowing.
If you have credit card balances, an overdraft or another debt with a high interest rate, paying down expensive borrowing may deserve attention before making large mortgage overpayments.
For example, putting £1,000 towards a mortgage with a relatively low interest rate while carrying a high-interest credit card balance may not be the most efficient use of your spare money.
Look at the interest rates, repayment terms and balances across your debts.
You may also want to keep some emergency savings available so that an unexpected expense does not force you to borrow again.
What about your pension?
Your mortgage and pension are two different financial priorities, but both can affect what you do with spare money.
If you are employed and your workplace pension includes employer contributions, check whether you are contributing enough to receive the employer contribution available under your scheme.
Before putting extra money into your mortgage, make sure you understand what you could gain or give up by changing your pension contributions. Pension rules and tax treatment can be complicated, so consider your individual circumstances and cialis 20mg australia seek regulated financial advice if you need personalised advice about pension contributions.
The important point is to look at your wider financial plan rather than treating mortgage overpayments as your only option.
What if you need the money soon?
This is where savings can have an important advantage. Imagine you are planning to replace your car, pay for a major home improvement or cover another large expense within the next year or two.
Putting all your spare money into the mortgage could leave you with less cash available when the expense arrives.
Keeping money in an appropriate savings account may give you more flexibility.
You might therefore decide to keep money you expect to need soon in savings while using only genuinely spare money for mortgage overpayments.
Your plans and timescale matter just as much as the interest rates.
You Do Not Have to Choose One or The Other
It is easy to think that you have to make an all-or-nothing decision. You don’t.
You could split your spare money between savings and your mortgage.
For example, if you have £300 left over each month, you might put £200 into savings and £100 towards your mortgage.
Another approach could be to build your emergency fund first and then increase your mortgage overpayment once you have reached a comfortable savings level.
You could also make occasional mortgage overpayments when you receive a bonus or other lump sum, while continuing to maintain your savings. The right balance depends on your circumstances.
A Simple Example: Saving vs Overpaying
Imagine you have £5,000 available and are deciding what to do with it.
You could put the £5,000 towards your mortgage, reducing the amount you owe. Alternatively, you could keep the money in a savings account and earn interest on it.
To compare the two options, look at:
- your mortgage interest rate
- the savings rate available to you
- how long you expect to keep the money
- whether tax could affect your savings interest
- whether your mortgage has an overpayment allowance
- whether an early repayment charge could apply
- whether you need access to the money
- whether you already have enough emergency savings
This is why a simple “mortgage rate versus savings rate” calculation does not always tell the whole story.
What if you are on a fixed-rate mortgage?
A fixed-rate mortgage gives you a set interest rate for an agreed period, but that does not necessarily mean you can make unlimited overpayments.
Your mortgage agreement may set limits on how much you can overpay during the fixed period.
If you are approaching the end of your fixed-rate deal, it may also be useful to review your mortgage options before deciding what to do with a large amount of spare cash.
Check the terms of your current mortgage and find out what charges could apply.
Do not assume that rules applying to one fixed-rate mortgage will automatically apply to another.
What if you are close to paying off your mortgage?
If you have only a relatively small mortgage balance remaining, you may be tempted to clear it as quickly as possible.
That can be an important milestone, but you should still check the numbers.
Find out whether an early repayment charge applies, how much interest remains to be paid and whether using your savings would leave you with enough money for unexpected costs.
Being mortgage-free can reduce your future monthly commitments, but keeping an appropriate amount of accessible savings can also provide financial security.
How to decide where your extra money should go
Start by making sure your essential bills are covered and your monthly budget is realistic.
Then look at your accessible savings. If you have little or no emergency fund, keeping some spare money available may be more important than making a large mortgage overpayment.
Next, consider any expensive borrowing you have. High-interest debts can affect how useful a mortgage overpayment would be.
Then compare your mortgage rate with the savings rate available to you. Remember to consider tax, access to your savings and whether either rate could change.
Finally, check your mortgage terms. Make sure you understand your overpayment allowance and whether an early repayment charge could apply.
After looking at these factors, you can decide whether saving, overpaying or splitting your spare money between the two fits your circumstances.
A Quick Checklist Before Making a Decision
Before using your spare money to overpay your mortgage or put it into savings, ask yourself:
- Do I have enough accessible savings for emergencies?
- Do I have any high-interest debts?
- What interest rate am I paying on my mortgage?
- What interest rate could I earn on my savings?
- Could tax affect the interest I earn?
- Does my mortgage allow overpayments without a charge?
- Will I need access to this money soon?
- Do I have any other important financial goals?
- What happens to my mortgage term or monthly payment if I overpay?
- Could I split the money between savings and mortgage overpayments?
These questions can help you make a decision based on your actual financial position rather than following a general rule.
Make Sure Mortgage Overpayments Fit Your Budget
Whatever you decide, make sure it does not put unnecessary pressure on your monthly finances.
A mortgage overpayment may help reduce your balance, but there is little benefit in making an aggressive overpayment if you then have to rely on credit to cover everyday expenses.
Likewise, building savings is useful, but you do not necessarily need to keep every spare pound in cash if your emergency fund is already in a comfortable position and your mortgage terms make overpayments suitable for you.
Your decision can change as your circumstances change. A pay rise, a new mortgage rate, changes in household expenses or a large upcoming purchase could all affect where your spare money is most useful.
If you need help organising your monthly spending before deciding what to do with your surplus, our guide to free budget planners and budget templates for UK households can help.
Final thoughts
Choosing between mortgage overpayments and saving is not simply about finding the highest number.
Your mortgage rate, savings rate, emergency fund, other debts, access to cash and mortgage terms all matter.
Overpaying could reduce your mortgage balance and potentially save interest. Saving could give you interest while keeping your money available for emergencies and future expenses.
You may also decide that a combination of both works better for you.
Before making a large payment, check your mortgage terms and consider what your money needs to do for you over the next few months and years.
The best decision is one that fits your wider finances and leaves you in a position you can comfortably maintain.
Frequently Asked Questions About Mortgage Overpayments and Saving
Is it better to overpay my mortgage or save money?
It depends on your circumstances. Compare your mortgage interest rate with the savings rate available to you, while also considering your emergency fund, access to your money, taxes, other debts and any mortgage overpayment charges.
Should I build savings before overpaying my mortgage?
Having accessible savings can be useful before making large mortgage overpayments because money paid into a mortgage may not be as easy to access. The amount you need in savings depends on your household circumstances and expected expenses.
What happens if my savings interest rate is higher than my mortgage rate?
Keeping money in savings could potentially produce more interest than you would save by reducing your mortgage balance. However, consider tax, account conditions, access to the money and the possibility that rates could change.
Can I overpay my mortgage without paying a penalty?
Some mortgage agreements allow overpayments up to a certain limit without an early repayment charge. Others may have different conditions. Check your mortgage terms before making an additional payment.
Should I pay off credit card debt before overpaying my mortgage?
High-interest debt may deserve attention before making large mortgage overpayments because it can cost more in interest. Look at the interest rates and terms of your debts before deciding how to use spare money.
Is it worth overpaying a fixed-rate mortgage?
It can be, but you need to check the conditions of your fixed-rate mortgage. There may be an annual overpayment allowance or an early repayment charge if you exceed the permitted amount.
Can I split my money between savings and mortgage overpayments?
Yes. You could keep some money in accessible savings while using some of your surplus to reduce your mortgage balance, provided the mortgage terms allow the overpayment.
Should I use my emergency fund to pay off my mortgage?
Using your emergency savings to make a mortgage overpayment could leave you without enough accessible money for unexpected expenses. Consider keeping an appropriate emergency fund before using savings for a large mortgage payment.
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