Martin Lewis offers simple formula for homeowners debating mortgage overpayment amid changing rates

With both savings and mortgage rates fluctuating, Lewis highlighted the importance of comparing your mortgage rate with potential savings returns.

On The Martin Lewis Podcast, a listener asked whether it was better to overpay their mortgage or put extra money into a high-interest savings account. Lewis explained: “My rule of thumb is: if your mortgage rate is higher than the after-tax amount you can earn in savings... you are better off overpaying the mortgage.”

The MoneySavingExpert founder used an example to illustrate his point: If your mortgage interest rate is 6 per cent but a savings account offers 5 per cent, it's more beneficial to pay down the mortgage. However, Lewis noted two important conditions: "1, check there are no penalties for overpaying the mortgage and 2, always give yourself an emergency fund of 3-6 months worth of bills put aside so if you were to have a problem you can still pay the mortgage."

Lewis also cautioned that previous overpayments on a mortgage won’t protect against falling into arrears if future payments are missed. He stressed the importance of ensuring that overpayments count as capital payments, saying, “Make sure the overpayments count as capital payments so it reduces what you actually owe rather than just reduce what you're paying on future monthly payments.”

If your mortgage rate is significantly lower than your savings interest rate, Lewis advised putting extra money into savings, where you could earn more interest. “As remortgaging time approaches, you could also then use your savings to make an overpayment,” Lewis explained, potentially reducing the amount you need to borrow and improving your loan-to-value ratio.

When mortgage and savings rates are nearly identical, Lewis suggested using a mortgage overpayment calculator, adding, "You're probably better off overpaying the mortgage, and psychologically it's better to overpay the mortgage anyway."

As autumn brings shifts in the mortgage market, several lenders have been cutting rates. Iain McKenzie, chief executive of the Guild of Property Professionals, told The Mirror: “The Bank of England has made some cautious progress in lowering interest rates as a result of falling inflation levels in the past year.” He anticipates similar trends as the year ends.

Nicky Stevenson, managing director at estate agent group Fine & Country, said: “Lower interest rates translate to reduced monthly mortgage payments, which should attract buyers back into the market, offering greater flexibility in their budgets and the opportunity to consider higher-priced homes.”