Due to the high interest rates over recent years, many homeowners have attempted to offset the impact by making overpayments on their mortgages. A common question is whether it’s better to overpay or not overpay your mortgage. Let’s look at the pros and cons of overpaying compared to boosting your pensions and savings.

Is it better to overpay the mortgage or save?

One of the advantages of high interest rates is that savings interest can increase, too. Depending on their outstanding balance and monthly interest payments, overpaying could save thousands over the mortgage term for some people.

Before you decide on whether to overpay your mortgage or boost your savings, consider the following:

• There are some older types of mortgages where you might see better returns by placing extra cash into a high-interest savings account. When you overpay a mortgage, you won’t have to pay interest on this amount. In some cases, this might offer a better cost-saving compared to the interest gained from a savings account.
• On the other hand, you might see a considerable cost-saving if you were to overpay a newer type of mortgage. If you choose this option, you will need to ensure that your overpayments reduce the debt and mortgage term to be beneficial. It’s worth noting that your lender may have penalty charges for early repayment of the entire balance.

The general rule of thumb is to calculate the difference between your current mortgage rate and your savings rate. If the mortgage rate is higher than the savings rate, then it might make sense to overpay your mortgage. However, there could be other options available that you may not have thought of, so always check first with a qualified financial planner.

Should you overpay the mortgage or pay into a pension?

Similar to the above point, this will depend on your individual financial situation and the current interest rates. It will also depend on your retirement plans and existing savings. Pensions offer lots of benefits from a tax perspective, especially for higher rate taxpayers, so there are various factors to consider.

If you are weighing up the benefits of overpaying a mortgage or moving money into a pension, we’ve listed a couple of key considerations:

• Pension savings offer varying forms of tax relief. Also, you can withdraw 25% of your private pension as a tax-free lump sum. You would need to be at the eligible age, which is 55, until 2028, when it rises to 57. If you have adequate savings, you might decide to use this lump sum to overpay or pay off your mortgage. Therefore, it might be more beneficial for certain people to increase their current pension contributions.
• Another approach would be to assess the actual cost of your mortgage. If you are paying large mortgage payments with high interest, then it might be more beneficial for you to overpay your mortgage in the short term. In the long term, this might provide you with a significant cost-saving. Again, if you choose this option, you should ensure that the overpayments reduce the debt and the mortgage term.

Before you start overpaying your mortgage, you will need to weigh up your long-term goals. For many people, mortgage overpayments allow them to pay off their mortgage sooner, helping to reduce their living costs. However, saving enough money to support your retirement is important and sticking to regular mortgage payments might be more beneficial.

Financial Planner, Nottingham and Lincoln

Balance: Wealth Planning has a team of financial planners who can advise you on a variety of matters, including overpayments. After an initial chat about your objectives, we will review to check your current financial position. As well as looking at your pensions and savings, we will consider the outstanding balance on your mortgage and any other debts.

Together, we can create a financial plan to help you decide whether it’s right to overpay your mortgage or a particular type of debt. Using sophisticated cash-flow planning software, we can build a forecast that enables us to model your financial future. Typically, we will create several ‘What if’ scenarios so you can see the potential outcomes of different decisions.

If you are thinking about overpaying your mortgage or another type of debt, get in touch to speak to our financial planners.

Sources:
https://www.moneysavingexpert.com/mortgages/mortgages-vs-savings/

https://www.pensionbee.com/blog/2023/january/should-you-pay-more-into-mortgage-or-pension