Martin Lewis has shared a “simple rule” to help savers decide whether to overpay their mortgage or put money into savings, in response to what he says is currently his most-asked question.
Appearing on ITV’s This Morning, the personal finance expert said people are worried about their mortgages but unsure whether it is best to pay them off or save instead, as interest rates push mortgage costs up while also offering better returns on savings.
The most-asked question
Host Ben Shephard put the question to Lewis: “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?”
Lewis explained that many people are trying to make their money go further, noting: “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.”
He added: “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.”
Prioritising expensive debt
Lewis said that before anything else, people need to decide what the biggest priorities are in their finances and where they could save money. He explained: “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.”
Beyond expensive debt, he said people need to do a calculation comparing savings with mortgages: “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.”
An easy comparison
He offered a simple example: “Let’s do it really simply. 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.”
He added: “And just 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 is widely predicted to keep rising over the coming months as higher energy costs continue to filter through, with households set to witness a roughly 4% rise in the energy price cap from next week. The Bank has predicted that inflation will increase to around 3.7% in the fourth quarter of this year and 4.2% in the first quarter of 2027.
Lewis summarised his 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.”
