The question of whether to over pay your mortgage or accept a low return on your money invested is an importance issue in today's economic climate. Extra payments allow you to build equity the moment the extra payment is made. While much is written about whether those with savings should overpay the current English Plan 2 student loans, there's little out there about Plan 1. Overpaying doesn’t just eat into the debt – it gets rid of the future interest you would have paid on that debt too Imagine you have a £300,000 mortgage … Since 6 April 2016, the new personal savings allowance means every basic-rate taxpayer can earn £1,000 interest without paying tax on it; equivalent to the interest on £75,000 in the top easy-access savings account – so 95% of people won't pay any savings tax at all. You'd still repay almost as much as you would sticking to contractual payments, and – crucially – you won't have reduced the term of your mortgage. If you overpay your mortgage and direct all of your extra payments towards the principal, not only will the principal amount be reduced, so will the amount of interest you’ll have to pay over the term of the mortgage. Lack of diversification. Many won't, and if all your student loan overpayments are doing is depriving you of extra cash now, then it's not worth it. If you have one of these, there's no problem putting all spare cash in the mortgage. Should I save, or overpay my mortgage? Now let’s say you decided to make extra payments of $300 each month. If you go through it, it can sometimes result in a payment or benefit to the site. The after-tax rate on the remaining £200 of interest (the final £6,667 of your savings) is at 2.4% (as 20% off 3% is 2.4%). It should be noted that extending your mortgage in order to invest your money elsewhere should only be done if you have a higher tolerance for risk, and have substantial emergency funds on the back burner just in case your investments fall through. You may not be allowed to overpay a personal loan (taken out pre-2011), TOTAL MORTGAGE INTEREST SAVED OVERPAYING A £150K MORTGAGE AT 2.99% (1), INTEREST IF YOU SAVED THE OVERPAYMENT AT 2% (2). So I want to explain with an example scenario. At the end of the mortgage life, you will have contributed $148,215.00 towards interest instead. With savings rates at rock bottom, overpaying on your mortgage is often a no-brainer. If you plunge extra money into your mortgage, you won’t be able to get it back very easily. If a link has an * by it, that means it is an affiliated link and therefore it helps MoneySavingExpert stay free to use, as it is tracked to us. Many loans are structured repayments, which means you have a designated amount to repay each month, over a fixed term. For those with a decent whack of savings, whether to overpay your mortgage can get a little complicated. Yet as with any rule of thumb, there are exceptions. Making overpayments can also mean you pay off your mortgage much quicker. At the end of the day, it’s all about crunching the numbers, and assessing your overall risk tolerance. The sooner your mortgage is paid off, the less money you’ve got in your hands to take advantage of tax deductions. You needn't switch to them right now, as overpaying your mortgage may win out. It's worth noting this means the third party used may be named on any credit agreements. Students who started university in 2011 or before, plus Northern Irish & Scottish students starting any time. First of all, let’s begin this discussion by explaining how a mortgage is calculated. Rates for £200,000 property, 25-year term, correct as of Oct 2020. Overpaying your mortgage reduces this effect, and may even cause you to lose a little bit of money over the long haul. Students who started university in 2012+ in England & Wales. We don't cover what to invest in as there's no right or wrong answer, only how to buy investments the cheapest way (see Share dealing need-to-knows and Stocks and Shares ISAs) so we won't be taking you much further along this road.