Archive: MoneySavingExpert's Money Tips Email

Martin: The 'SHOULD I OVERPAY MY MORTGAGE?' question
Mortgage rates are rocketing. Millions can save £10,000s overpaying, others should save instead. Which are you?
New. Boosted mortgage overpayment calculator

The mortgage market turmoil continues. A year ago you could fix at just under 1%, now the cheapest mainstream deals are 2yrs: 4.82% | 5yrs: 4.48% | 10yrs: 4.09% (full info in our mortgage comparison). That 3%pt-ish rise in mortgage rates equates to around £150/mth more (£1,800/yr) per £100,000 of mortgage debt. To ensure your rates are as low as possible see our mortgage turmoil help from last week.

Today though, I want to focus on a specific issue many are asking me about. Should those still with savings use them to reduce their mortgage debt? For some, yes, but like a troop of baboons, there are plenty of big buts...

• KEY RULE: Only overpay if your mortgage rate is higher than the rate you'd earn saving. After all, as a simple example, £10,000 in savings at 2% earns £200 for the year, yet use it to overpay a 3% mortgage and it reduces costs by £300 for the year. Effectively overpaying is tax-free 'saving' at the mortgage rate, so if the rate's higher than savings (after tax) it wins.
  
  - Recent mortgages: Rates are high, so it's here the benefit of overpaying is most likely.
  - Older fixes: Your rate is likely still cheap, possibly below 2%, while the top savings rates are 2.5% easy-access or 4.2% for a year's fix. So, saving is likely to win. If so, put the money away UNTIL your mortgage fix ends (timing fixed savings to end then too is useful) and at that point, consider using it towards reducing your new likely-much-higher-rate mortgage.
  
  
• New. Boosted mortgage overpayment calculator: £100/mth overpaid can save £20,000+ interest. Overpaying isn't just a short-term gain, it reduces what you owe, so less interest compounds. The benefit can be huge.
  
  For example, our Mortgage overpayment calculator shows on a £150,000 mortgage at 5% (25yr term), overpay £100 monthly and you'd reduce interest by £23,000 and repay 4yrs & 6 months earlier. And we've just added a new function to the calculator, so you can compare the return on overpaying, versus saving.
  
  The gain isn't just theoretical - Pauline tweeted me a while back: "@MartinSLewis I overpaid my mortgage each month and saved 10 years in payments and £30k in interest. Thank you for your advice."
  
  
• If it looks like you should overpay... three checks. Even if the maths looks a winner...
  1) Do you have other more expensive debts (eg, credit cards)? If so, prioritise clearing them, see overpay my debt?
  2) Are there any overpayment penalties? Many lenders let you overpay 10% of your mortgage balance each year, but add penalties above that, which usually kiboshes any gains. See overpay without penalty?
  3) Ensure you've an emergency fund. My rule of thumb is have three to six months' bills money saved, and only overpay any savings above that. Don't assume just because you've overpaid, if you were unable to cover the mortgage a few months, they'd say it's fine - you'd likely be in arrears.
  
  
• Reducing your mortgage size can get you a better deal. Overpaying might mean you drop a loan-to-value band when you next remortgage - as it reduces the proportion of your home's current value you're borrowing.
  
  The main bands where interest rates really drop are at 90%, 80%, 75% and 60%. So, if you overpay enough to drop to a lower band, it can be a big winner. Equally, if saving wins for you, save at top rates until it's time to remortgage then use those savings (leaving an emergency fund) to reduce what you borrow.
  
  
• To gain from overpaying, ensure your lender reduces the term not your repayments. Ask your lender to ensure each overpayment reduces your mortgage term. Some instead just lower your future repayments, and keep you paying over the same period, so there's no interest gain. Don't just shorten your mortgage term though, as that locks you in to higher future repayments - see my old Overpaying vs shortening term blog for more. 

PS: Overpaying and saving are ways to use your money with no capital (initial cash) at risk. The other choice is investing, where you hope for better rates, and are prepared to risk capital to get them. There's nowt wrong with investing (especially over longer terms), I just don't cover it, and it's tough to know what'll win without the benefit of hindsight.

New. Top fixed savings now pay 4.56% - the highest rate since 2009, with easy access up to 2.5%

Check if your bank has passed on rate rises - many haven't. If not, ditch & switch

The UK base rate is up, and after recent turmoil, market interest rates are up even more. Both should push savings rates higher, and have for some top accounts. But millions have cash in accounts that pass on little or none of the rise. So vigilance pays - check your savings now. EARN UNDER 2%? Leave if you can, as even bog-standard easy-access rates pay more.

Of course, with inflation still sky-high at just under 10%, in real terms, your money is shrinking. However, that's not an excuse for inaction - there are big differentials out there, and the more you earn, the more you mitigate the loss.

• Fixed rates are out-powering easy-access right now. Fixed savings - much like mortgage fixes - go up with long-term City interest-rate predictions, which have rocketed in recent weeks, while easy-access accounts tend to follow the base rate more. Therefore, right now fixes look good value.
  
  Warning: Rates and top payers can change by the hour, so all links go via our savings guide, which we update as quickly as we can. 
  
  

  Today's top savings rates All accounts have the full UK £85,000 savings safety guarantee
  Account term	SAVINGS (see all top savings)	CASH ISAs (see all top ISAs) For the few who pay savings tax (see below)
  Easy access  (withdraw & deposit at will)	- Yorkshire BS 2.5% AER (only on up to £5,000). Pays 2% AER above and limited to just 2 withdrawals a year. - RCI Bank 2% AER (min £100 deposit). Unlimited withdrawals. - Barclays 5.12% AER (on up to £5,000) BUT only for its Blue Rewards account customers.	- Penrith BS 2.75% AER (min £100 deposit) but NOT online (only via post/branch). - Paragon Bank 1.9% AER (min £1). Limits you to 3 withdrawals a year. - Tesco Bank 1.86% AER (min £1). Unlimited withdrawals.
  1-year fix (money locked away unless cash ISA)	- Secure Trust Bank 4.2% AER (min £1,000). - Investec 4.15% AER (min £5,000).	- Secure Trust Bank 3.65% AER (min £1,000). Withdrawals allowed, but with 90 days' interest penalty.
  2-year fix (money locked away unless cash ISA)	- SmartSave 4.56% AER (min £10,000). - Secure Trust Bank 4.55% AER (min £1,000).	- Virgin Money 4.12% AER (min £1). Withdrawals allowed, but with 90 days' interest penalty.

  
  There are longer fixes but there's little premium (max rate 4.61%) for going longer - see long fixed savings.
  
  
• Is it worth fixing savings now if UK rates may rise further? That's incredibly difficult to answer, as things are so uncertain - so we'll do our best, but can't promise to be right...
  
  For those who can lock cash away, as one-year fixes out-pay easy-access by nearly 2 percentage points, you'd need rapid and large UK base rate rises for easy-access to win over that period. It's possible, but uncertain, while the instant gain of fixing is certain.
  
  Of course, it could be that if you waited until after the next Bank of England base rate decision on 3 Nov, you may be able to fix at much higher rates. Yet some of the predicted interest rate rises are likely already factored in to current fixed rates, and while there's room for them to rise further, we don't know by how much. So overall, our best guess is that fixes look decent, but we wouldn't lock in for too many years in a rising, uncertain market.
  
  
• Cash ISAs should only be for those who pay savings tax. Most don't... though more do than before. The personal savings allowance (PSA) allows basic-rate taxpayers to earn £1,000/year of savings interest tax-free (higher-rate taxpayers £500/year). So at today's top easy-access rate, a basic-rate payer would need just over £50,000 of savings to generate that, but just £23,800 in the top one-year fix.
  
  If you've far less, just go for normal savings as the interest is normally far higher. But if you're close or over those limits, and you're likely to earn interest over the PSA, cash ISAs come into their own, as the interest is always tax-free and doesn't count for the limit. See how to compare savings rates with cash ISA rates if you pay tax.
  
  
• Can you boost interest further? Some specialised options in our Savings section pay even more:
  
  - 50% bonus for many on universal credit or tax credits. See Help to Save.
  - 25% bonus for first-time buyers aged 18 to 39. See Top Lifetime ISAs.
  - Earn up to 5% on smaller amounts if you save monthly. See Regular savings.
  - Earn 5% on smaller savings. See Current account savings.
  - Are Premium Bonds worth it now the prize rate is up? See Premium Bonds.
  - Prefer to invest? Higher returns, but more risk. See Stocks & shares ISAs.