Overpay or save: the simple rule
Every pound you overpay saves you interest at your mortgage rate, and that saving is tax-free. Every pound you save earns the savings rate, minus any tax on the interest.
So overpaying usually wins when your mortgage rate is higher than what your savings earn after tax. Once a higher-rate taxpayer has used their £500 tax-free allowance, 4% interest outside an ISA is worth only about 2.3% from April 2027.
When saving is better
- You don’t have an emergency fund. Keep 3–6 months of spending in easy-access savings first. Money you overpay is hard to get back.
- You have other, dearer debts. Pay off credit cards and car loans first.
- Your savings rate beats your mortgage rate after tax. This is common on cheap fixed rates taken out before 2022.
- You’re a higher earner who could use a pension instead. Pension contributions get 40% tax relief, which beats almost any mortgage rate. See the £100k tax trap calculator.
The remortgage shock
If your fixed rate ends soon, your monthly payment will be worked out again at the new rate. Overpaying now means a smaller balance when you remortgage, which softens the jump. It can also lower your loan-to-value and get you a better rate.
Fix ending in the next 6 months?
You can usually lock in a new deal up to 6 months early. A fee-free mortgage broker can compare the whole market for you.
Talk to a mortgage brokerWorked example
They owe £200,000 at 5% with 25 years left. They have £200 a month spare.
| Mortgage payment | £1,169 a month |
|---|---|
| Overpaying £200 a month | 5 years 7 months sooner |
| Interest saved | £38,188 |
That’s if their rate stays at 5% and they keep overpaying until it’s paid off.
Overpayment limits and fees
Most fixed-rate mortgages let you overpay up to 10% of the balance each year without a fee. Above that, you may pay an early repayment charge, often 1–5% of the extra. Check your mortgage offer or ask your lender. Most lenders reduce your monthly payment or shorten your term after an overpayment, so tell them which you’d prefer.
Questions
Should I reduce my payment or my term?
Shortening the term saves the most interest. Reducing the payment gives you more breathing room each month. This calculator assumes you keep paying the same amount, so your term gets shorter.
How are savings taxed?
Basic-rate taxpayers can earn £1,000 interest a year tax-free, higher-rate £500, and additional-rate nothing. Above that, from April 2027 interest is taxed at 22%, 42% or 47%.
What about the cash ISA limit?
From 6 April 2027, people under 65 can put up to £12,000 a year in a cash ISA. The overall ISA limit stays at £20,000, with the rest going into stocks and shares.
What does this calculator leave out?
Early repayment charges, product fees, rate changes on variable mortgages, and inflation. It assumes savings rates stay the same. It’s a guide, not financial advice.