Should I overpay my mortgage or save? The rate test, with examples

Should I overpay my mortgage or save? Compare your mortgage rate with your after-tax savings rate

Overpaying your mortgage beats saving when your mortgage rate is higher than the rate your savings earn after tax. Every pound you overpay earns your mortgage rate, tax-free and guaranteed, because it is interest you no longer pay. A pound in savings earns the account rate, minus any Income Tax above your allowances.

Two checks come before the rate test. According to MoneyHelper, the government's free money guidance service, you should always pay off more expensive debts before reducing your mortgage, and keep enough money to live on for at least three months. Once those are done, the numbers decide.

In the example used throughout this guide, a £200,000 repayment mortgage at 4.5% over 25 years, overpaying £200 a month saves £36,280.39 of interest and clears the loan 6 years and 1 month early. Run your own balance, rate and extra payment through the mortgage overpayment calculator to see your figures.

How mortgage overpayments work: extra money comes off the capital

A mortgage overpayment is any payment above your normal monthly amount, and on a repayment mortgage it reduces the capital (the amount you owe), not the interest already charged. Because interest is worked out on the balance, a lower balance means less interest every month after that.

Lenders then apply the overpayment in one of two ways, and many let you choose:

• Reduce the term: your monthly payment stays the same and the mortgage ends sooner. This saves the most interest.
• Reduce the payment: the lender recalculates a lower monthly payment over the same remaining term.

Timing matters. MoneyHelper says that if your mortgage interest is charged daily, the sooner you overpay the better; if it is charged annually, time the overpayment so it counts towards that year's interest calculation. Ask your lender how and when it applies overpayments, and check your next statement to confirm the balance fell.

The 10% overpayment allowance is common, but your lender sets it

Many lenders let you overpay up to 10% of your mortgage a year without an early repayment charge (ERC), according to MoneyHelper. This is a lender rule, not a legal limit: the exact allowance, whether it is 10% of the balance at the start of the year or of the original loan, and whether the year runs by calendar year or from your deal's anniversary all come from your mortgage offer.

MoneyHelper warns that you could be charged for paying more than your agreed limit. It also says:

• fixed-rate deals often allow up to 10% a year without a fee, with charges if you leave the deal early;
• tracker deals usually have fewer or no limits on extra payments;
• on a standard variable rate (SVR) there is usually no limit on overpaying, even in large amounts.

On a £200,000 balance, a 10% allowance is £20,000 a year. Overpaying £200 a month is £2,400 a year, which is 1.2% of the balance, well inside it. If you plan a large lump sum, check how much allowance is left this year before you pay, because an ERC is often a percentage of the amount repaid over the limit.

Worked example: £200,000 at 4.5% over 25 years with £200 a month extra

Overpaying £200 a month on a £200,000 mortgage at 4.5% over 25 years cuts the interest from £133,499.49 to £97,219.09, a saving of £36,280.39, and ends the mortgage in 227 months instead of 300. These figures come from the site's mortgage overpayment engine, with the normal monthly payment of £1,111.66 kept the same and the rate assumed fixed for the whole term.

A one-off lump sum works the same way. Paying £10,000 at the start, 5% of the balance and inside a 10% allowance, saves £19,300.45 of interest and 2 years 2 months. MoneyHelper's own example gives a similar picture: on a £250,000 mortgage at 5% with 25 years left, a £5,000 lump sum cuts the interest by £11,970 and ends the mortgage 11 months earlier.

Real rates change when a fixed deal ends, so treat long-term totals as a guide. The first five years, covered below, are more certain.

Reduce the term or reduce the payment: the term saves more interest

Keeping your monthly payment the same and shortening the term saves more interest than taking a lower payment, because the balance falls faster. The difference is large.

Example. On the £200,000 mortgage at 4.5% over 25 years, pay a £10,000 lump sum now:

Reducing the term saves £12,625.48 more. Reducing the payment still has a use: it lowers the amount you must pay each month, which helps if your income may fall or if you would then save the £55.58 difference. Compare both options for your own lump sum with the lump sum payment or term comparison; it is set up for US loans, but the maths is the same for a UK repayment mortgage.

The break-even: your mortgage rate against your after-tax savings rate

The break-even savings rate is your mortgage rate divided by (1 minus your tax rate on savings interest). Below that gross rate, overpaying wins; above it, saving wins, before you count flexibility.

Tax on savings depends on your allowances. According to GOV.UK, the Personal Savings Allowance lets you earn interest tax-free each tax year up to:

GOV.UK also says that if your other taxable income is under £17,570, the starting rate for savings can make up to £5,000 of interest tax-free. Interest inside an ISA is tax-free, and according to GOV.UK you can put up to £20,000 into ISAs in the 2026 to 2027 tax year.

For a 4.5% mortgage, your savings account needs to pay at least this much before tax to match overpaying:

Two changes from 6 April 2027 make overpaying relatively more attractive. According to the GOV.UK technical note published at Budget 2025, savings income will be taxed at 22%, 42% and 47% instead of 20%, 40% and 45%, with the Personal Savings Allowance unchanged. GOV.UK also confirms the cash ISA limit falls to £12,000 a year for people under 65 from that date, within the £20,000 overall ISA limit; people aged 65 or over keep a £20,000 cash limit.

Your tax band on savings comes from your total income; the marginal tax rate glossary entry explains how to find it.

Five years side by side: £200 a month overpaid or saved at 4%

Over five years, overpaying £200 a month on the 4.5% mortgage is worth £1,429.11, more than the same money in a 4% savings account for every taxpayer, even when the savings interest is tax-free.

Overpaying. After 60 months the balance is £162,286.70 instead of £175,715.81, £13,429.11 lower. You paid in £12,000, so £1,429.11 of that is interest you did not pay.

Saving. £200 a month for 5 years at 4% a year, compounded monthly, grows to £13,303.99, which is £1,303.99 of interest. This figure comes from the compound interest savings calculator, which adds each deposit at the start of the month, a small advantage to saving.

The taxed rows only apply if your other savings already use up your Personal Savings Allowance. On its own, this pot earns £477.43 of interest in its fifth year, which fits inside both the £1,000 basic rate and £500 higher rate allowances. That is the case where a basic or higher rate taxpayer should compare the tax-free row.

The savings pot has one real advantage: you can spend it. Money overpaid into most mortgages cannot come back out, which is why the next two checks matter more than the rate gap.

Build an emergency fund and clear dearer debt first

Overpaying a mortgage should wait until you have an emergency fund and no expensive debts. MoneyHelper says to keep enough money to keep you going for at least three months before paying off your mortgage early, because money overpaid into a standard mortgage is locked in the house.

Credit cards, catalogue accounts and unsecured loans usually charge far more than a mortgage. MoneyHelper says to always pay off more expensive debts before reducing your mortgage. A card at 24% costs more than five times the interest of a 4.5% mortgage on each pound owed. Choose an order for several debts with debt snowball vs avalanche.

Pension contributions are the other contender. MoneyHelper points out that with employer contributions and tax relief, you might get more for your money in a pension than you would save in mortgage interest. If your employer matches extra contributions, take the match first; pension tax relief shows what each £1 costs you.

An offset mortgage lets your savings cut interest without locking them away

An offset mortgage links your savings to your mortgage so you pay no interest on the part of the balance equal to your savings. According to MoneyHelper, with a £200,000 offset mortgage at 3% and £10,000 in the offset account, you pay interest on only £190,000.

Your offset savings usually earn no interest, but they save interest at the mortgage rate, and that saving is not taxed as savings income. You can still withdraw the money if you need it, which removes the main drawback of overpaying. MoneyHelper lists the downsides: you earn no interest on the savings, there is limited access to discounted deals, and you could earn more on your savings elsewhere.

An offset deal suits someone with a large emergency fund or money set aside for tax bills. If your offset rate is higher than the best ordinary deal you could get, work out whether the interest saved on your offset savings covers that difference.

Overpay before you remortgage to lower your loan-to-value

Overpaying before your deal ends lowers your loan-to-value (LTV), the balance as a percentage of your home's value, and MoneyHelper says a lower LTV can help you get a cheaper rate. It suggests setting a reminder to start shopping for a new deal at least six months before your fixed or discount deal reverts to the lender's SVR.

Example. On a home worth £250,000, the £200,000 mortgage above falls to £175,715.81 after 5 years of normal payments: an LTV of 70.3%. With £200 a month overpaid, it falls to £162,286.70: an LTV of 64.9%. If your lender prices its deals in bands, dropping below a band edge such as 65% can mean a lower rate on the whole balance.

Use any overpayment allowance left in the final year of a fixed deal, then check whether your new deal allows the overpayments you plan. When the deal ends and you sit on the SVR, MoneyHelper says there is usually no limit on overpaying, so a lump sum can go in before the new deal starts. Model the new monthly payment with the mortgage repayment calculator.

Bank Rate is 3.75%: what it means for overpaying now

The Bank of England held Bank Rate at 3.75% on 17 September 2026, and its next decision is due on 5 November 2026. Bank Rate affects the rates banks pay on savings and charge on variable mortgages.

If you are on a tracker or SVR, your mortgage rate moves with Bank Rate, so the overpay or save gap can change after each decision. If you are on a fixed rate, your mortgage rate is set until the deal ends, while easy-access savings rates can fall or rise. MoneyHelper notes that overpaying when rates are low leaves you with a smaller mortgage if rates rise later.

Your next step: find your mortgage rate, your overpayment allowance and its reset date on your mortgage offer or online account. Check you have three months of spending saved and no dearer debts. Then enter your balance, rate and planned overpayment into the mortgage overpayment calculator and set up the overpayment with your lender, asking it to reduce the term.