Should I overpay my mortgage or save?

Making the right financial decision: Mortgage overpayments vs saving

Mortgage overpayments vs saving

Paying off your mortgage early sounds like the obvious choice, but is it the best financial move? On the one hand, eliminating your mortgage debt sooner not only brings peace of mind but could save you a significant amount of interest payments. 

On the other hand, building a healthy savings account is a vital safety net that every household should aspire to. Not to mention the possible investment opportunities that savings can open you up to.

So, is it better to overpay your mortgage or save your money? There’s no right or wrong answer, as the choice depends on your circumstances. To help you make an informed decision, we’ve explored the pros and cons of overpaying vs saving.

Woman holding a baby in the kitchen.

The case for overpaying a mortgage

One of the most compelling reasons to overpay your mortgage is the reduction in interest over the life of the loan. The quicker you can pay off the capital, the less interest you'll pay. Overpaying your mortgage can also reduce your loan length, helping you become debt-free sooner.

Should I overpay my mortgage when inflation is high?

Generally speaking, overpaying your mortgage is always a good idea. When inflation is high, paying more towards your mortgage means the higher rate of interest is applied to a smaller debt, therefore making it more affordable overall.

However, if savings interest rates are also on the rise,  this can create a logical argument for saving instead of overpaying. 

When you should save

If you have a lower interest rate on your mortgage than on your savings account (for example, your mortgage is 3% and your savings is 6%), it makes financial sense to save rather than overpay your mortgage. This way, you’ll benefit from accrued interest while your savings rate is higher than your mortgage. You can always use that money (plus a little extra from interest) to arrange a one-off lump sum mortgage overpayment later. 

When you should overpay

Now, if your mortgage interest rate is similar to (or more than) your savings interest rate, it’s recommended that you overpay your mortgage instead. This is because the interest you’ll earn from savings would be less than the interest you’re paying on your mortgage. So, in short, you’ll save more money long-term by overpaying than you would by saving.

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The case for building savings

It’s advisable to have a savings account that is well-funded, as it can serve as a valuable financial buffer in times of unforeseen emergencies - such as job loss or illness. This can provide a sense of security, knowing that there’s a safety net in place to help cover any unexpected expenses that may arise.

What are the reasons to save over overpaying a mortgage?

There are several reasons why people choose to put their spare cash into savings accounts, rather than put it towards their mortgage. Building an emergency fund and paying off other debts are two significant savings goals that we’d recommend prioritising over mortgage overpayments. 

  • Emergency Fund: Before overpaying your mortgage, ensure you have an adequate emergency fund. Financial advisors often recommend having three to six months' worth of living expenses set aside.
  • Other Debts: If you have high-interest debts like credit card balances, it's generally wiser to pay those off before aggressively overpaying your mortgage.
  • Interest Rates: Compare the interest rate on your mortgage with the potential returns from other investments. If your mortgage has a low-interest rate, you might be better off investing your extra funds elsewhere.
  • Future Goals: Consider your long-term financial goals. Are you planning to move in the next few years? Do you have other big expenses on the horizon, like home renovations, education, a wedding or starting a business?
  • Comfort: Some people value the emotional satisfaction of being mortgage-free more than the potential financial gains from investing. It's essential to strike the right balance between financial prudence and emotional well-being.



When should I save instead of overpaying?

Next steps...

The decision to overpay your mortgage or save depends on your unique circumstances and goals. It's worth discussing your options with a financial advisor who can provide personalised advice based on your situation. 

Whether you choose to become mortgage-free sooner or build a robust savings account, remember that both paths have their advantages. The most important thing is to make a decision that aligns with your financial aspirations.