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Martin: "With interest rates likely to rise, should I save or overpay my mortgage?"
Eight need-to-knows that could save you £10,000s

It's thought very likely in November, the Bank of England will increase the base rate from 3.75% to 4%. In fact, the market is currently pricing in that the rate will rise four times over the next year. As new fixed mortgage rates depend on the market's view of future rates, fixes are getting costlier. A couple of months ago, the cheapest two-year fix was 4.1% - now it's 4.8%.

Plus, tracker and variable rates are likely to follow suit if the base rate rise predictions come true. No surprise, then, that one of the most common questions I'm asked at the moment from those with spare cash is: "Should I save or overpay my mortgage?" So below I've the eight key need-to-knows. Before that though... 

What exactly will happen to interest rates? And what it means for mortgages, savings & more. This is the focus of my latest Big Topic podcast. I'm joined by an economist and a mortgage broker to look ahead to exactly what'll happen and, crucially, what it means for your borrowing and savings. Eg: Is a cheap tracker mortgage better than a fix right now? Do give it a listen, via BBC Sounds | Apple | Spotify and other podcast platforms. Related: Mortgage Best Buys | Top Savings | Beginners Guide to Investing

1. Do you have more expensive card, loan or overdraft debt? If so, it's generally best to prioritise using spare cash to clear them instead - see Should I overpay cards & loans. Overpaying student loan debt is a much more complex decision - it depends on which Plan you're on and your specific circumstances See my Should I ovepay Plan 2 loans blog for some basics.

2. If your mortgage rate's higher than the (after-tax) interest on savings, overpaying adds up. Let's keep this simple... £10,000 saved at top 4.5% savings earns £450 interest (£360 for those who pay basic-rate tax on it), yet use it to overpay a 6% mortgage and it saves you £600 interest. So if your mortgage rate's higher than the after-tax rate you earn on savings, overpaying makes sense. Another way to think of it: it's like saving, tax-free, at your mortgage rate. 

Then again, if you're still on a legacy cheap mortgage at 1% or 2%, there's no point in overpaying that for now (see point 7). Use our Mortgage Overpayment Calc to see both the absolute gain and how overpaying compares to saving.

As Deb emailed last year: "Hello! I wanted to say a huge thank you. This afternoon I redeemed my mortgage 11 years early, thanks to your site! Nearly 14yrs ago, I was a single mum, buying my 1st property, pretty feckless with understanding financial terms. Then I read you advised overpaying, if possible, and happily and fortuitously I've been able to make lump sum pay offs and now, aged 57, I feel I can relax and even contemplate retirement. Raising a glass to you and your team, Martin."

Or more recently WofC on X: "@martinslewis Overpay as much as you can. I'm on track to pay a 30 year mortgage off in 10 years. This will save me around £85,000 in interest."

3. What you compare matters! Ensure it's YOUR best possible mortgage vs YOUR best possible savings. If your mortgage could be better and you're free to move, check what the best rate you're likely to get is. Use our Mortgage Best Buys comparison for a benchmark, and free Remortgage guide for step-by-step help or speak to a mortgage broker.

The same's true with savings. If your accounts pay a paltry rate, as far too many do, it's easy to ditch and switch (unless they're locked away in a fix). On lump sums, you can earn up to 5% in top savings, so that's what you should be comparing with.

4. TWO KEY CHECKS before you act. If overpaying looks a winner, check... 

• Are there overpayment penalties? Many lenders let you overpay 10% of your mortgage balance each year penalty-free. Above that, there are often penalties which could wipe out much of the gain, so do check.
  
  
• Always keep a cash emergency fund. The fact you've overpaid your mortgage doesn't automatically mean if circumstances change and you suddenly can't repay, the lender will say 'oh, no probs' - you'd still be in arrears. So my rule of thumb is always have enough money to cover 3 months' bills (or even better, 6) accessible in savings, and only overpay with any money above that (unless it's a specific offset mortgage).

5. Borrowing over 60% of your home's value? It can pay even more to overpay. If you can save at a rate higher than your mortgage, use our Mortgage Overpay vs Savings Calc to see the exact cost. If the savings are only trivially better, and you're borrowing a decent chunk of your home's value, remember your Loan-To-Value (LTV) plays a big factor in the mortgage rate you can get. The lower your LTV, the better your deal - until it drops below 60%, where it stays the same. 

Overpaying to reduce your mortgage debt may lower the rate of future mortgage deals - see LTV thresholds which improve mortgage rates. With over a million fixed-rate deals ending this year, it's a consideration for many.

6. When overpaying, ensure it reduces your TOTAL MORTGAGE BALANCE. Overpay and some lenders just reduce your next or future monthly repayments. That may help cash flow, but you won't see a big reduction in interest. To do that you need to ensure overpayments reduce your mortgage balance while keeping the same monthly repayment. This has the practical effect of helping you clear your mortgage sooner, resulting in an interest gain.

So, when you overpay, tell the lender you want it to reduce the capital owed which effectively reduces the mortgage term, not the monthly repayment. This way you'll be mortgage-free quicker. If a lender makes this difficult by lowering your monthly repayments, just keep paying what you were or more (effectively overpaying each month) to have the same impact. To be clear: I'm NOT saying ask to reduce the term, that may need an affordability test - see my old Decrease term v overpay blog.

7. If saving beats overpaying your mortgage, save the right way. There are still many people with super-cheap 1% or 2% mortgages, who right now are far better off saving than overpaying. For many others, it's a closer call. Yet both should be aware that at some point, that deal will end and your new mortgage rate could be far higher, meaning the equation changes.

So if you are saving, having that money available and liquid (spendable) when the deal is coming up for renewal is important, as it means you can use it to reduce your borrowing at that point if needed. To do that, you'll want money in easy-access savings then - this doesn't mean you can't use fixed savings before, just ensure they mature before your mortgage fix ends.

8. What about overpaying the mortgage vs investing? I'm asked this far less often, which is a shame. More people should consider investing money unneeded for 5+yrs rather than saving it (see my beginner's investing guide).

• Put money in savings and you can withdaw and overpay any time. Yet investing is a long-term choice, so you need to be comparing it to your likely typical mortgage rate over the next five years or more, not just your current rate. So if you're on a low rate now, use a best buy comparison to see likely rates for you when that ends. 
• If your mortgage rate is relatively low long term, putting money in a broad spread of investment stands a decent chance of significantly outperforming overpaying. If your rate is higher, say 5.5%, your question is what level of return would you want for it to be worth sacrificing the "bird-in-the-hand" of a guaranteed tax-free 5.5% return. Only you can answer that, and then contrast it to investment return rates - but it's worth thinking about. Ultimately it's about your attitude to risk.
• If overpaying could lower your mortgage rate due to the LTV (see point 5), that strengthens the argument for overpaying over investing, as you'll usually be reducing the cost of a larger mortgage by sacrificing gains on a smaller investment.

• Only borrow if it's NEEDED, budgeted for & affordable. Loans are best for a deliberate, planned, budgeted-for one-off expenditure with lasting gain (eg, repairing a broken kitchen, not booking a holiday). So only do it if you really need it and can afford to repay, minimise the borrowing and repay as quickly as you can. If in doubt, don't.
  
  Related Help: Is debt consolidation worth it? | Cut existing loan costs | Car Finance | Struggling with debt? help
  
  
• The UK's cheapest fixed-rate personal loans. It's far better to apply via the Loans Eligibility Calculator, which will first show you the loans you're most likely to be accepted for - as applying and getting rejected hits your acceptance odds elsewhere. You can also do eligibility via our MSE's free Credit Club (& via MSE's Apple or Android App), where it can also evaluate your credit strength and suggest how to improve acceptance odds. 
  
  

  Cheapest personal loans: (links take you to find which loans you're most likely to get) -  £7,500 to £25,000: M&S 5.9%. AA 5.9% (member) or 6.4% (non-member). Tesco Bank 6.2% (need free Clubcard). -  £7,000 to £7,499: People's Choice 6.5%. M&S 6.9%. Tesco Bank 7.4% (need free Clubcard). -  £5,000 to £6,999: M&S Bank 6.9%. Tesco 7.4% (need free Clubcard). Santander 7.5%. -  £3,000 to £4,999: Santander 8%. M&S, Zopa (via John Lewis) 9.9%. -  £1,000 to £2,999: Zopa (via John Lewis) 9.9%. Santander 10.5%. But for this lower level of borrowing, over a short term 0% credit card loans can work out cheaper.

  
  - All these loans are 'representative APR', meaning sadly only 51% of accepted applicants must be given the advertised rate (others accepted can be charged more, without limit). However, via the eligibility calc, some lenders now offer guaranteed rates or show you the rate you'll likely get before applying.
  
  - All these loans are UNSECURED (a good thing): It means a lender can't automatically look to take your home if you don't repay (secured gives security to the lender, not you).

• Occasionally, a loophole means borrowing more costs you less. While generally you should minimise borrowing, if you're borrowing an amount (£100 or £200, say) just below a threshold where rates get cheaper (currently that's at £3,000, £5,000, £7,000 and £7,500), nudging the amount you borrow up just above the threshold can actually be cheaper. Full help and calculator on this in Can you use the loan rate loophole? But as an example...
  
  - Borrow £7,400 at 6.5% over 5 years - total repayments: £8,687,
  - Borrow £7,500 at 5.9% over 5 years - total repayments £8,679. So less in total, even though you borrow more. 
  
  
• How lenders decide who to lend to... As with all lending, when you apply you'll be credit-scored to see if you've been a good credit citizen. Each lender scores you differently based on its own wish list of what makes a profitable customer. Yet less known is that most lenders also do an affordability score (using your income from your application form, so do include every penny - but don't lie) to see whether you can actually afford to repay.
  
  And with loans, affordability is far more important than with, say, credit cards, because you're applying for a specific amount. The same lender may accept you for a £3,000 loan, for example, but reject you at £10,000. MSE's free Credit Club (available via the MSE App on Apple and Android) shows your credit and affordability scores and helps diagnose any issues. Plus, a version of our eligibility calc is within the Club.