Overpay your mortgage or save the money? How to compare
Compare your mortgage rate with the net rate on savings, keep an emergency fund first, and know your overpayment limit
If you have spare cash each month, paying down the mortgage and putting it in savings both have merit. Which one leaves you better off depends on two numbers: your mortgage rate and the rate you would earn on savings after tax. This guide shows you how to compare them and what to sort out first. Information only, not personal advice.
Step 1: build the emergency fund first
Money overpaid into a mortgage is hard to get back. Most lenders will not let you re-borrow it without a new application, and some charge for it. So before you overpay, set aside three to six months of essential spending in an easy-access account. That covers a boiler failure, a car repair or a gap between jobs without needing to borrow at high interest.
Step 2: compare the two rates properly
Overpaying your mortgage is the same as earning a guaranteed, tax-free return equal to your mortgage rate. Savings interest can be taxed once you go over your Personal Savings Allowance, which is £1,000 for basic-rate taxpayers, £500 for higher-rate and nil for additional-rate.
| Savings rate (gross) | Net for basic-rate taxpayer over allowance | Net for higher-rate taxpayer over allowance |
|---|---|---|
| 4.5% | 3.6% | 2.7% |
| 5.0% | 4.0% | 3.0% |
Interest inside a cash ISA is tax-free, so an ISA rate can be compared directly with your mortgage rate. The 2026/27 ISA allowance is £20,000. From 6 April 2027 under-65s will be limited to £12,000 a year in cash ISAs, so the tax-free savings route narrows next year.
A rough rule: if your mortgage rate is higher than the best net savings rate you can get, overpaying wins on the numbers. If your mortgage rate is lower, saving wins, and you keep the flexibility. Check a comparison site for today's savings rates and look past 12-month bonuses to the underlying rate.
Step 3: know your overpayment allowance
Most fixed and tracker deals let you overpay up to 10% of the outstanding balance each year without an early repayment charge. Some lenders calculate it on the original loan, some on the balance at the start of each year, and a few allow more. Go over the limit and the charge can be 1% to 5% of the excess, which wipes out any gain. Check your offer letter or ask your lender for the exact figure and the date the allowance resets.
If you are on the standard variable rate, there is usually no limit and no charge, but the SVR is typically 7% or more, so remortgaging is normally the bigger win.
Step 4: decide what the overpayment does
When you overpay, ask the lender to reduce the term rather than the monthly payment. Reducing the term clears the debt faster and saves the most interest. Reducing the payment gives you breathing room in the budget but saves less overall. Either way, ask for written confirmation.
Offset mortgages: the middle route
An offset mortgage links your savings account to your mortgage. You pay interest only on the mortgage balance minus your savings, but the savings stay accessible. On a £200,000 mortgage with £20,000 in the linked account, you pay interest on £180,000. The savings earn no interest, but the interest you avoid is tax-free and at your mortgage rate. Offset rates are often a little higher than standard fixes, so they suit people with large cash balances or lumpy income such as the self-employed.
Watch out for
- Overpaying before clearing expensive debt. A credit card at 25% or an overdraft near 40% costs far more than any mortgage.
- Losing the emergency fund. Keep it separate and do not count it as spare.
- Assuming the 10% allowance carries over. Unused allowance usually does not roll into the next year.
- Ignoring pension contributions. Employer matching and tax relief can beat both options, but that is a separate decision and worth its own research.