Martin Lewis has addressed the question he is currently asked more often than any other: whether to overpay a mortgage or put money into savings instead. Appearing on ITV's This Morning, the personal finance expert said people are increasingly worried about their mortgages but unsure whether to pay them off or save.
The issue centres on interest rates, which are pushing mortgage costs higher while also improving returns on savings. Presenter Ben Shephard asked: "So that question that you get asked more often than anything. Should I overpay? If someone is lucky enough to have some savings and the opportunity to do something like that, should they overpay?"
Savings figures and priorities
Lewis explained that many people are trying to stretch their money further: "Whenever I talk about savings, people go, who's got savings? I mean, just report from Bank of England today, an extra £4.7 billion has just been put into savings. In the pandemic alone, £150 billion. We have over a trillion quid worth of savings in this country. This is not a small issue and it's why we get more questions about savings and debt when we do the open phone it. So that's why I wanted to cover the subject."
He said that before acting, people must establish their financial priorities and identify where savings could be made: "First thing you do if you've got other expensive debt, you know, credit card debt, a loan that's expensive that you are allowed to overpay without penalties. You want to clear those before you're clearing your mortgage because their interest rate is high. So, we'll start with that."
The simple rule of thumb
Beyond costly debt, people need to weigh savings against their mortgage. Lewis said: "The next question is - if your mortgage rate is higher than the after tax rate you can earn in savings, you would in principle want to overpay your mortgage rather than save. If you can earn more in savings than your mortgage rate is costing, then in principle you would probably want prefer to save than overpay your mortgage. Because overpaying your mortgage is effectively like saving at the mortgage rate."
He gave a simple example: "You've got £1,000 in the savings account at 4%. You're going to earn £400 a year, although it may be taxed. You've got £10,000 of debt on your mortgage at 6%. It's going to cost you £600 a year. Overpaying the mortgage has the effect of saving at the mortgage rate. That's why the easy comparison. Although I would go on to a mortgage overpayment calculator to check. Um, and just to to put this into context, if you were to overpay £200 a month on your mortgage on a 5% mortgage with a 20-year term, you would clear it four years early and save £30,000 in interest."
Inflation outlook
Inflation is widely expected to keep climbing in the months ahead as elevated energy costs work through the system, with households facing an approximate 4% increase in the energy price cap from next week. The Bank has forecast inflation will rise to roughly 3.7% in the fourth quarter of this year and 4.2% in the first quarter of 2027.
Lewis outlined a straightforward rule: "There's a simple rule of thumb here. If your mortgage rate is higher than the after-tax rate you can earn on savings, you're generally better off overpaying the mortgage. If your savings rate is higher than you're paying on your mortgage, you're generally better to save."
