Is it better to pay off a mortgage or save?

Overpaying your mortgage has many advantages, most notably that it will cut the amount of interest you need to pay.

However, putting money into savings also has many benefits and, depending on your situation, it could make more sense to build up your savings instead of overpaying your mortgage.

It’s important to consider a range of different factors to help you decide whether you should overpay or if a different option may be better for your situation.

Should I use savings to pay off my mortgage?

When savings rates are low, it could be a good idea to overpay your mortgage instead of putting all your money into savings. This is because the amount of money you could save on mortgage interest would outweigh the amount you could earn by putting the equivalent sum into savings.

However, if your mortgage rate is lower than the best savings rate, it could be worth putting your money into a high-paying savings account.

For example, if your mortgage rate is 3% and you can find a savings account that’s paying 5%, it may be more financially beneficial to put the money into savings instead of paying off your mortgage. You could then choose to make a lump sum overpayment on your mortgage at a later date, using the money you saved.

If you choose to pay off your mortgage, it’s important to keep some money in savings that you can fall back on in an emergency. Having an emergency fund to cover three to six months of your living expenses can give you some financial security if you’re faced with an unexpected shock or expense, such as emergency repairs or if you lose your job, for example.

Furthermore, make sure you’ve thought about saving for your retirement. For example, if you’re not already contributing to a pension, you may want to focus on this as a priority instead of overpaying your mortgage.

It’s ultimately your decision whether you use any extra money to overpay your mortgage or save. And bear in mind that it doesn’t need to be one option or the other. You could choose to put some money into savings and/or your pension and some towards paying off your mortgage.

Is it worth paying off my mortgage early?

If you can afford to do so, paying off your mortgage early could save you thousands of pounds in interest.

Many lenders allow you to overpay up to 10% of your outstanding mortgage balance each year, without paying any penalty charges, but this can vary between products and providers.

Overpayments will reduce your mortgage balance and, because the balance is smaller, it means you will be charged less interest overall.

For example, let’s say you have an outstanding balance of £200,000 and 25 years remaining on your mortgage, with a current interest rate of 4.50%.

Making a lump sum overpayment of £20,000 could reduce your mortgage term by around four years and save you approximately £35,000 on interest.

Alternatively, paying an extra £100 towards your mortgage each month could reduce your term by around three years and save you approximately £21,000 on interest.

This example is based on several assumptions, including that the interest rate will remain at 4.50% for the duration of the mortgage, so the exact amount you could save by overpaying may vary.

Overpaying your mortgage also helps to reduce your loan-to-value, which could help you to access more competitive interest rates if you remortgage to a new deal. This could be especially significant if overpaying will bring you into a lower LTV band (typically at 5% intervals between 60% and 95%).

Overall, the question of whether it’s worth overpaying your mortgage will depend on your situation.

It may be worth overpaying if:

• you have a sufficient emergency fund in savings
• you’re already putting money into a pension and are on track to meet your retirement plan
• you don’t have any other outstanding debts with a higher rate of interest, such as credit cards or overdrafts
• you won’t be hit with any hefty early repayment charges
• it means you would drop to a lower loan-to-value (LTV) threshold
• you wouldn’t earn more on interest by putting the money into a savings account.

If any of these points don’t apply, it doesn’t mean that it’s not worth overpaying your mortgage. But it may be worth reconsidering and seeing if it would be better for you to consider other options, such as paying off other debts or putting money into savings, for example.

Is it better to pay a lump sum or increase your monthly payment?

It’s up to you whether you pay a lump sum or pay extra towards your mortgage each month, and it’s likely to depend on your situation.

For example, if you receive a bonus from work or inherit some money, you may want to put this lump sum towards paying off your mortgage.

It’s worth checking how often interest is calculated on your mortgage as this could influence when you make the overpayment. If it’s calculated daily, it doesn’t matter when you overpay. But if it’s calculated monthly or annually, for example, making the overpayment just before the interest rate is calculated will have a greater impact than if you make the payment just after.

Alternatively, if you don’t have a lump sum and simply want to pay a little bit extra towards your mortgage each month, you will usually be able to set up a regular overpayment.

Both methods of overpayment will save you money on interest. And, whatever option you choose, make sure you check how much your lender will allow you to pay without incurring any penalty fees.

Should I reduce my term or my monthly payments?

When you overpay your mortgage, you may be able to choose to reduce your mortgage term and keep your monthly payments the same or reduce your monthly payments and keep your term the same.

Reducing the term of your mortgage will mean you pay less interest than if you choose to reduce your monthly payments. So, unless there’s a specific reason why you want to reduce your monthly payments, it’s likely to make more sense to ask your lender to reduce your term so you pay off your mortgage quicker.

Is an offset mortgage a good option?

A compromise between overpaying your mortgage and putting money into savings is an offset mortgage.

An offset mortgage is linked to your current or savings account and can help to reduce the amount of interest you pay.

For example, if your mortgage is £250,000 and you have £50,000 in the linked savings account, you would only pay interest on £200,000 of your mortgage.

You may also be able to withdraw money from your savings, if necessary, which makes it a more flexible option than making an overpayment on a standard mortgage.

However, interest rates on offset mortgages can be higher than standard mortgages, and you won’t earn interest on your savings, so it’s important to compare options and get professional advice to help you find the right product for your situation.

At what age should your mortgage be paid off?

There’s no set age at which your mortgage should be paid off, but most people will want to pay it off as quickly as possible.

Many people aim to pay off their mortgage before they retire, so they won’t need to continue making payments from their pension income. However, the reality can be very different as people taking out mortgages with terms of 30 years or longer may find themselves paying off their mortgage in retirement.

Lenders may set a maximum age limit on their mortgage products, which means you need to have paid off the mortgage by the time you get to that age. However, you may still be eligible for a mortgage if the term ends beyond this date, as long as you can prove you can still afford to make the repayments.

Bear in mind that, even if you’re within the age limit, you will only be approved for a mortgage if you can prove you can afford the repayments.