Overpay the mortgage or keep money in savings?

If you have spare money at the end of the month, the choice between overpaying the mortgage and leaving it in savings comes down to two rates: what your mortgage charges you, and what your savings earn after tax. Overpaying saves interest at your mortgage rate, and there is no tax on the "savings" you make by overpaying¹. Savings interest, by contrast, is taxed once it exceeds your Personal Savings Allowance, at your usual rate of Income Tax².

That tax treatment is the part people miss. From April 2027 the tax on savings interest rises by two percentage points across all bands, so the savings basic rate becomes 22%, the higher rate 42% and the additional rate 47%³. A taxable savings account therefore has to beat your mortgage rate by more than it used to, just to break even.

Most mortgages let you overpay up to around 10% of the balance each year without a charge, and 70% of current deals allow overpayments of up to 10% of the balance each year⁵. Before any of that, though, the money needs to be genuinely spare, which means an instant-access emergency fund comes first.

Compare your mortgage rate with your after-tax savings rate

The comparison is a single question: which rate is higher, your mortgage rate or your savings rate after tax? Overpaying a mortgage is equivalent to earning a guaranteed, tax-free return equal to your mortgage rate, because every pound you overpay stops interest being charged on that pound¹. A savings account paying a rate that is taxed is worth less than the headline rate once tax is taken, so the mortgage rate has to be compared with the net figure, not the headline one. Interest above your Personal Savings Allowance is taxed at your standard income tax rate, whether that is 20%, 40% or 45%⁸.

The gap matters more than the direction. If your mortgage charges more than your savings pay after tax, overpaying reduces the balance faster and cuts the total interest bill. If savings pay more after tax, the money works harder in the account, and you keep access to it. Neither answer is permanent: mortgage rates change when a fixed deal ends, and savings rates move with the market, so the comparison is worth redoing at each of those points rather than setting once.

There is also a middle option. An offset mortgage links a savings balance to the mortgage, so you pay interest only on the difference. On a £300,000 offset mortgage with £20,000 in linked savings, interest is charged on £280,000⁹. You keep access to the cash, and because no interest is earned on it, there is no tax to pay and no use of your Personal Savings Allowance⁹. The trade-off is that offset deals are a smaller part of the market and the rate is not always the cheapest available.

How tax on savings interest changes the comparison

Interest above your Personal Savings Allowance is taxed at your standard income tax rate, whether that is 20%, 40% or 45%⁸. The effect is that a higher-rate taxpayer with £20,000 in a top savings account would earn £932 after tax, and would be better off holding the money in an ISA¹⁰. That is the shape of the calculation. The gross rate on the account is not the rate you keep.

Reporting is largely automatic. After the end of the tax year, your bank or building society tells HMRC how much interest you earned, and your tax code is adjusted to include an estimate of the interest you may earn in the current tax year². If your savings interest is more than £10,000, you need to tell HMRC yourself on a Self Assessment tax return². If too much has been deducted, you can claim it back either through self-assessment or, if you are employed, by filling in an R40 form¹¹.

Two structural points bear on the comparison. First, the tax on savings interest is a small but growing share of the total tax take: 2.0% of Income Tax liabilities came from savings interest in 2023 to 2024¹². Second, the rise in rates from April 2027 is confirmed in legislation and guidance, not just announced: the savings basic rate rises to 22%, the higher rate to 42% and the additional rate to 47%³. The savings higher rate is 40% in the 2026-27 tax year, so the increase is a real change in the arithmetic, not a rounding¹³.

Savings tax rates are due to rise by 2 percentage points

The increase applies across all bands from April 2027: two percentage points at the basic, higher and additional rates for savings income¹⁴. In cash terms, a basic-rate taxpayer faces a 22% charge on savings interest, a higher-rate taxpayer 42%, and an additional-rate taxpayer 47%¹⁵. The same Budget also raised tax on dividend income by two percentage points at the ordinary and upper rate from April 2026¹⁴.

What this does to the overpay-or-save decision is straightforward. A higher-rate taxpayer whose savings interest currently sits above their allowance keeps 60p of every pound of interest today, and will keep 58p from April 2027. The mortgage overpayment, meanwhile, keeps its full value, because the saving is untaxed¹. The higher the band, the wider that gap becomes, which is why the comparison tends to favour overpaying more often for higher and additional-rate taxpayers than for basic-rate ones.

There is a timing point too. The change takes effect from 6 April 2027, so anyone deciding now is comparing today's after-tax savings rate with a rate that is already legislated to fall. The ordering rules for reliefs also change from April 2027, with the personal allowance set against income that is not property, savings or dividend income first¹⁶. That can change which slice of income the savings rate applies to, so the effect is not identical for every taxpayer.

Keep an instant-access emergency fund before overpaying

Money paid into a mortgage is not readily available again, so the emergency fund comes first. The practical test is whether you could cover essential costs if your income stopped: mortgage or rent, food, electric and gas¹⁷. StepChange's guidance is to use an instant-access savings account for this, so the money can be reached without notice or penalty⁷.

An overdraft is not a substitute. MoneyHelper's position is that overdrafts should only be used for emergencies or as a short-term option¹⁸. Relying on one to absorb a shock means paying overdraft interest instead of earning savings interest, which reverses the whole comparison. The same logic applies to any other borrowing: using savings to clear an overdraft balance saves money in the long term¹⁹.

Once the emergency fund is in place, the money above it is the money in play. That is the point at which the mortgage rate and the after-tax savings rate decide the answer, and it is also the point at which the overpayment allowance becomes relevant, because overpaying beyond it can cost more than it saves.

Overpaying or saving: what each one does for you

Overpaying reduces your mortgage balance, because every payment above the standard monthly amount pays off more of the capital you owe²⁰. The effect compounds: you repay the mortgage quicker and pay less interest in total²¹. As an illustration of scale, an overpayment of £100 a month on a £200,000 mortgage could shave more than three years off the term and save £10,000 in interest²². That figure is from 2021 and depends on the rate assumed, so it shows the mechanism rather than a promise.

Saving keeps the money liquid and earning. The advantage is optionality: the cash is available for a repair, a gap in income or an opportunity, and it is not tied to the property. The disadvantage is tax, once interest exceeds the allowance, and the fact that a savings rate can fall while a mortgage rate is fixed.

A middle route is the offset mortgage, which sets savings against the mortgage balance so interest is charged on less, while the cash stays accessible⁹. Bank of Scotland, for example, describes two versions: one where savings reduce the mortgage balance and no interest is earned on them, and one where you earn interest on savings up to the value of the mortgage, which does not reduce mortgage interest and may be taxable²⁴. The first avoids tax entirely; the second does not.

Where overpaying does not make sense

Overpaying is the weaker option in several identifiable situations. If your savings rate after tax is higher than your mortgage rate, the money earns more where it is. If you have no emergency fund, overpaying locks away the money you would need first⁷. If you are behind on any priority debt, the mortgage itself is the priority: mortgages are priority debts, and a lender could repossess the home and sell it to recover the money²⁵.

The overpayment allowance is the other limit. Most fixed-rate mortgages allow overpayments of up to 10% of the balance each year, either in regular payments or ad hoc, and overpaying more in a 12-month period may trigger an early repayment charge⁶. The same allowance appears across the market: typically up to 10% of the mortgage balance each year without being charged²⁶. Fewer than 10% of deals offer no overpayment options at all, so the allowance is close to universal, but the size and the penalty for exceeding it vary by lender and deal⁵.

There is also a structural point about the loan itself. Most mortgage providers and clients prefer repayment mortgages, which are fully repaid at the end of the term if all payments are made²⁷. Overpaying a repayment mortgage shortens the term. Overpaying an interest-only mortgage does not reduce the monthly payment in the same way, and if the term ends soon, the options are different: you may need to switch to a repayment mortgage to overpay in the usual sense²⁸.

When fixed-rate savings and mortgage deals end

Both sides of the comparison have an expiry date, and they rarely fall together. On the mortgage side, at the end of the fixed period you need to remortgage; if you do not, you are moved to your lender's standard variable rate, which is usually much more expensive²⁹. That is the moment to redo the comparison, because the rate you are comparing against changes.

On the savings side, a fixed-rate account matures on a set date. If you do not tell the provider what you want, funds are usually moved into a different account such as an instant-access deal, rolled into a savings account of the same length, or paid back into the current account the money came from³⁰. That default may pay less than the maturing account did. When Masthaven Bank withdrew from the savings and mortgage market, fixed-term savers were told they would either have their deposit returned on the account's maturity date, or possibly before, with funds continuing to earn the same rate until then³¹.

The practical step is to diarise both dates and decide in advance. If the mortgage deal ends first, the new rate sets the benchmark for the next comparison. If the savings account matures first, the rate you can get on the money when it lands decides whether it stays in cash or goes to the mortgage.

Should I pay into a pension instead of overpaying my mortgage?

A pension is a third destination for spare money, and it works differently from both of the others. Contributions attract tax relief, but higher and additional-rate taxpayers have to claim the remainder, 20% for higher rate or 25% for additional rate, by filing a Self Assessment tax return¹⁵. The money is then locked away: the minimum age to access pension savings rises from 55 to 57 in 2028³².

The order of operations matters more than the comparison here. Official guidance is that if you are behind on your mortgage, rent, credit card or other debt payments, a pension might not be the right step now³². Mortgages are priority debts, so arrears come before retirement saving²⁵. Among homeowners with a mortgage, 22% say repayments stop them saving more for retirement, which shows how often the two compete for the same money³³.

Where there is no arrears and the emergency fund is in place, the pension question is about time horizon rather than rate. Money needed before retirement cannot come out of a pension, so it belongs in savings or against the mortgage. Money not needed until retirement is a different calculation, and one where the tax relief is the main advantage.

Getting help

Free, impartial help is available. MoneyHelper provides guidance on borrowing and overdrafts¹⁸. StepChange offers debt advice, including on emergency savings and repayment plans⁷. Citizens Advice and Shelter can help with mortgage difficulties and repayment options³⁴. If a complaint about a financial firm is not resolved, the Financial Ombudsman Service can look at it³⁵.