Overpay or save?

Hi guys

Current mortgage owing is £134,000 with 18 years left of a 20 year mortgage.

Since the mortgage started I have overpay £500 every month and each December i have overpaid a lump sum. £6000 last year and £5000 this year.

I am 2 years into a 5 year fix of 1.89%

So now I can get a 3% ISA from Virgin, my head is saying put this £500 every month and the lump sum into there instead of overpaying it. I do also understand I am not gonna be able to get a rate of 1.89% in 3 years time (I doubt) and that each year my 10% I can overpay will be less and less so won't be able to directly overpay such a large lump sum.

This is where I am either doing something wrong or understanding something wrong.

I use the mortgage overpayment calculator on MSE as it shows you the difference between overpaying versus saving.

I have taken the lump sum out of the equation as it does not allow me to add a lump sum every year, just a one off.

The results say I will save £11,110 in interest and pay the mortgage off 8 years sooner by overpaying my £500 p/m


£10,050 in interest in the ISA for depositing £500 p/m

So a net gain of £1,070 for overpaying

Why is this so? Surely the 3% in savings is better than 1.89% interest from the mortgage

There will be a simple answer for this I am sure haha


  • IAAM
    IAAM Posts: 95 Forumite
    First Anniversary Name Dropper Combo Breaker First Post
    I wish I knew the answer to this as it's really puzzling me! 

    My personal figures are completely different from yours (i.e. my mortgage rate is only 1.64% and my savings rate is much higher at 4.5%) - so the outcome when I use the calculator shows that it is more beneficial for me to put my money in a savings account. My mortgage term is only 10 years, compared with your 18 year term.

    I agree with you though that it's surprising that the 3% savings didn't show as being the better route for you?? Hopefully someone can work out the reason for this....

    Mortgage Balance: £162,615.84 (December 2022); £163,945 (November 2022)
    Current MF date: Feb 2032.  (Previously: Jan 2033)

    Target MF date: May 2027
    (Overpayments needed to achieve this: £1,750pm!) 

    Joint spend: £391.09 (Nov)
  • SandyShores
    SandyShores Posts: 1,477 Forumite
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    edited 23 December 2022 at 12:20AM
    I'm really glad you asked this question as I used a 3% savings rate in the mortgage calculator a couple of weeks ago and it told me that it was better to overpay my 1.9% mortgage.  Which when I thought about it later seemed really strange and I thought I must have input the wrong figures.  I've just used a higher interest rate of 4% and it says that saving is better.

    I've just looked this up on MSE and this is what it says on the Mortgage pages:

    "The simple rule of thumb is:

    KEY RULE: If your mortgage rate is around the same, or higher than your savings rate, then it makes sense to overpay... (even if it isn't, overpaying might still win) 

    Do note that when it comes to savings, the reverse isn't automatically true. A higher savings rate could beat overpaying your mortgage, but it won't always. It will depend on a number of things, including whether you are planning a one-off overpayment or if you want to overpay regularly (say monthly) over the longer term, how much your mortgage debt is and how many years you have left to repay your mortgage."

    Sorry, I don't why, hopefully someone will be along who can tell us.  Would it be something to do with the daily rate of interest on your £134k being added and then interest is then charged on that, whereas the savings is a smaller amount than the £134k?

    Mortgage 30Apr est. £184,460 £244,947, Ends Jan'38 Jun'39 (target Feb'31)
    H2B Loan Est: £73,657 (accord to NW) - saved for Jun25 so far £10

    EF £6,325; Personal savings (PBs/ISA new car fund): £2149
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  • IAAM
    IAAM Posts: 95 Forumite
    First Anniversary Name Dropper Combo Breaker First Post
    Hi both,

    Thanks for flagging up the MSE clarification SandyShores. Given what it says, I'm thinking it's the combination of vernall's mortgage term still being quite long (18 years), coupled with the fact that there's only 1.11% difference between the mortgage rate of 1.89% and the savings rate of 3%?

    As I mentioned in my post, my term is relatively short (10 years) and the difference between my mortgage rate (1.64%) and savings rate (4.5%) is more noticeable at 2.86%.

    It just goes to show how helpful these tools are to us as, so that we can make informed decisions on whether to capitalise on savings rates (and squeeze every extra £ out of our money as we possibly can) or whether to just OP the mortgage.
    Mortgage Balance: £162,615.84 (December 2022); £163,945 (November 2022)
    Current MF date: Feb 2032.  (Previously: Jan 2033)

    Target MF date: May 2027
    (Overpayments needed to achieve this: £1,750pm!) 

    Joint spend: £391.09 (Nov)
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