Josh is an award-nominated journalist with nearly a decade of experience, including writing for national newspapers. A data whizz, he specialises in covering personal finance and investing.
Overpaying your mortgage has the potential to shave years off your debt, but that doesn’t mean it’s always the right choice, especially if you can find a good savings rate on the market.
There’s also the option of investing your extra income into the stock market instead, where you might get much better returns, but this carries additional risks.
So which one should you choose? We’ve crunched the numbers to see how overpaying, saving and investing compare.
Please note: the content contained in this article is for information purposes only and does not constitute financial or investment advice.
Mortgage overpayments provide you with a guaranteed and risk-free return via paying off your debt early and reducing the overall amount of interest you have to repay. The only risk is if your home drops in value, although you would still need to pay off the debt in either case.
Cash held in a savings or Isa account also provides a risk-free guaranteed return.
This makes the two options directly comparable. In fact, if you had a savings account with the exact same interest rate as your mortgage, saving £250 per month vs overpaying your mortgage by the same amount would give identical returns.
As a result, the choice between the two can appear straightforward. In general, if your mortgage rate is higher than the savings rate available to you, overpaying is likely to be the better option.
The bigger the difference between the two rates, the bigger the difference in outcomes.
Interest rates aren’t the only thing to consider, though, and other factors can affect which option makes the most sense for you.
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Investing is another option people often consider when deciding what to do with spare income.
In theory, you could beat your mortgage rate by investing in the stock market. But this approach involves risk.
Over the long term, investing has typically outperformed cash. Analysis by investment platform IG shows that, since 1999, UK stock market investors have seen around seven times the real return of cash savers after inflation.
Unlike mortgage overpayments and savings accounts, investing returns are not guaranteed. If your investments perform poorly, you could lose money.
Since mortgages are also usually long-term investments, it’s fair to compare the two, but it’s not a perfect like-for-like comparison. Many people prefer the certainty of a savings account or mortgage overpayment, rather than the possibility of better returns on the stock market.
To show how the numbers stack up in real life, here’s an example.
Let’s assume you have a £200,000 mortgage with 30 years left to run and an interest rate of 5%, which is around the current average for a two-year fixed deal.
If you made no overpayments, you would take the full 30 years to clear the debt and repay £386,512 in total. Of that, £186,512 would be interest.
The table shows how much interest you could save by overpaying your mortgage each month, as well as how much you could shave off your mortgage term.
| Monthly overpayment | Mortgage term reduction | Interest saved |
|---|---|---|
| £50 | 2 years and 10 months | £20,924 |
| £100 | 5 years and 2 months | £37,314 |
| £150 | 7 years and 1 month | £50,567 |
| £200 | 8 years and 8 months | £61,540 |
| £250 | 10 years and 1 month | £70,796 |
Even an extra £50 a month cuts almost three years off the term and saves more than £20,000 in interest.
Instead of overpaying, you could put that £250 a month into savings or investments.
The best savings rates on the market are around 4-5%, although you might be able to find slightly better if you shop around. Meanwhile, a 7% return on investment is an optimistic but achievable expectation for an experienced investor.
The table below compares three approaches using £250 a month:
The ‘mortgage term reduction’ shows the point at which your savings or investment pot becomes large enough to clear the remaining mortgage in one lump sum.
| Method | Mortgage term reduction | Mortgage interest saved | Interest or investment growth earned by the time you repay |
|---|---|---|---|
| Overpay your mortgage by £250 per month | 10 years and 1 month | £70,796 | £0 |
| Save £250 per month at 4% | 9 years and 3 months | £24,315 | £34,834 |
| Invest £250 per month at 7% | 11 years and 6 months | £36,128 | £58,186 |
Example based on a £200,000 repayment mortgage with 30 years remaining at 5% interest.
If you invested £250 a month and achieved a 7% return, it would take 18 years and 6 months to build a pot worth £113,686. Of that, £58,186 would be investment growth. At that point, you could use the pot to clear the remaining mortgage balance in full.
Compared with making no overpayments at all, this would cut 11 years and 6 months off your mortgage term and reduce your interest bill by £36,128.
You can see in the first chart how much quicker your mortgage is paid off with overpayments.
The second chart shows the value of your investments if you were to save £250 per month at 4% or invest at 7%.
The points at which the 'saving' line and 'investing' line intersect the 'mortgage balance' line indicates when you could use these returns to fully pay off your remaining mortgage.
Of course, your mortgage rate is likely to change over the lifetime of the debt, as will savings rates and investment returns. But making decisions today based on what may or may not happen in the future can lead to poor choices, and you can always change your strategy further down the line where necessary.
Remember that you don’t have to go all in on one strategy. Some people will prefer a mix of all three approaches based on their own financial situation.
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Individual circumstances vary, and there are a few factors to consider before choosing the option that's right for you.
First things first: before you make this decision, ensure you have a rainy-day fund.
The generally accepted rule is to have at least three months' worth of essential outgoings saved in cash for emergencies.
You should also ensure that your other debts have been paid off first, or are at least under control.
If you’re carrying debt on credit cards or personal loans, these often charge much higher interest rates than a mortgage.
In many cases, clearing this type of debt first will save you more money than overpaying your home loan.
Many mortgage deals limit how much you can overpay without penalty.
Fixed-rate mortgages typically allow penalty-free overpayments of up to around 10% of the outstanding balance each year, although this varies by lender and deal.
If you exceed this allowance, you may be charged an early repayment charge, which can quickly outweigh any interest savings.
If charges apply, it may be better to wait until you can overpay for free, or put the money into savings or investments instead.
In our analysis earlier we assumed a consistent interest rate across the life of the mortgage.
But in reality, lenders generally offer better rates on smaller loan sizes. So if you can reduce the size of your mortgage through overpayments, you may be able to secure a better deal when you come to remortgage.
Bear in mind that you may need to pay tax on your savings interest if you go over your personal allowances. Similarly, you may be liable for capital gains tax and dividend tax on your investments.
However, there’s no tax on the ‘savings’ you make by overpaying your mortgage.
Counter this by wrapping your savings and investments in an Isa to keep them safe from HMRC.
An offset mortgage is a home loan where savings held in a linked bank account are subtracted from the amount of mortgage that you pay interest on.
For example, if you have £20,000 in a savings account that's linked to an offset mortgage of £300,000, you would only pay interest on £280,000.
However, offset mortgages usually come with higher interest rates than ordinary repayment mortgages, which will undo most of the benefits of offsetting.
