If your mortgage rate is higher than the rate you can get on savings after tax, overpaying usually comes out ahead. If savings pay more, saving wins. But the rates aren't the whole story. Money paid into a mortgage is hard to get back, so you need an emergency fund first, and you need to stay inside your lender's overpayment limit.
The basic comparison
Every pound you overpay saves you interest at your mortgage rate, and that saving is effectively tax-free. Every pound you save earns interest at the savings rate, which may be taxed. So the fair comparison is:
- Mortgage rate against
- Savings rate after any tax you'd pay on the interest
Take £10,000. On a mortgage at an example rate of 4.5%, overpaying saves about £450 of interest in the first year. In a savings account at an example rate of 4%, it earns £400 before tax. If that interest is taxed at 20%, you keep £320. At 40%, you keep £240.
Where the Personal Savings Allowance fits in
Most people don't pay tax on savings interest because of the Personal Savings Allowance. For 2026/27 it is:
| Income tax band | Interest you can earn tax-free |
|---|---|
| Basic rate | £1,000 |
| Higher rate | £500 |
| Additional rate | £0 |
Interest inside a cash ISA doesn't count towards this and isn't taxed at all. So a basic-rate taxpayer with a modest savings pot, or anyone using their ISA allowance, can compare the headline savings rate directly with the mortgage rate. Higher and additional-rate taxpayers with larger savings outside an ISA should knock the tax off first, and that tips things towards overpaying.
Worked example
Say you have a £180,000 mortgage over 25 years at an example rate of 4.5%, which works out at £1,000.50 a month. You have an extra £200 a month to spare. These figures assume the rate stays at 4.5% the whole time, which in real life it won't.
Option 1: overpay £200 a month for the whole mortgage. You'd clear it in 221 months instead of 300, so 6 years and 7 months early, and pay about £35,177 less interest (£84,972 instead of £120,150).
Option 2: compare over five years. After five years of overpaying £200 a month, you'd owe £144,715 rather than £158,144, a difference of £13,429. Save the same £200 a month at an example rate of 4% instead and you'd have about £13,260, of which £1,260 is interest. If that interest fell within your Personal Savings Allowance or an ISA, the two options are within a couple of hundred pounds of each other. For a higher-rate taxpayer paying 40% on the interest, the savings pot would be worth about £12,736, so overpaying is clearly ahead.
Try your own figures with the mortgage overpayment calculator and the savings calculator.
Check for early repayment charges
Most fixed and tracker deals have an early repayment charge (ERC) if you pay off more than a set amount during the deal. Many lenders let you overpay up to 10% of the balance each year without a charge, but some allow less, so check your mortgage offer or ask your lender. On a £180,000 balance, 10% is £18,000 a year, which is more than most people overpay anyway.
Go over the limit and the charge is usually a percentage of the excess, often a few per cent. A 2% charge on £30,000 would be £600, which can wipe out a year or more of interest savings. Once your deal ends and you're on the lender's standard variable rate, you can normally overpay as much as you like.
Keep an emergency fund first
Money paid into a mortgage is gone unless the lender allows payment holidays or borrowing back, and you can't count on that. If the boiler packs in or you lose work, a lower mortgage balance won't help pay the bills. Most people are better off keeping three to six months of essential spending in easy-access savings before overpaying.
It's also worth clearing expensive debts first. Credit cards and overdrafts usually charge far more than any mortgage, so paying them off is the better return.
Don't forget your pension
Pension contributions get tax relief at your highest rate of income tax, and if you're employed your employer may match extra contributions. A basic-rate taxpayer putting £80 into a personal pension gets it topped up to £100. For a higher-rate taxpayer it's even better. That's a bigger head start than mortgage interest savings, though the money is locked away until at least your mid-to-late 50s. Many people do a bit of both.
Other things that might sway it
- Remortgaging soon. A lower balance can push you into a cheaper loan-to-value band, which lowers your rate on the next deal.
- Peace of mind. Some people simply sleep better with less debt, and that's a fair reason.
- Flexibility. Savings can be used for anything. If you might need the money for a car, a wedding or a career break, saving keeps your options open.
- Reduce the term or the payment. When you overpay, some lenders cut your monthly payment while others shorten the term. Ask which, as shortening the term saves more interest.
This is general information, not financial advice.
Last reviewed October 2026.