Overpay vs. save simply calculation

Anand

Hi,

I'm trying to figure out if there is a simple calculation to determine if saving is more beneficial than overpaying on a monthly basis.

Is it fair to assume the following:

1. If the saving interest rate is greater than the mortgage interest rate for the same period, it's better to save
2. The effective savings interest rate is reduced by which ever tax band you are in.. e.g. if the saving rate is 5% and I am a higher-rate earner, I should use 60% of the 5% - i.e. 3% for the purpose of comparing ?

 Thanks

Newbie_John

1. Yes
2. Depends really. For higher rate first £500 is tax free so 5% that would be £10k, then you're right, it will be 3% after that. But you can avoid tax by putting money to ISA, save £10k a year - put it to fixed ISA next year, keep saving again. If you have a partner they come with additional allowance of tax free savings. You also have Premium bonds which are tax free etc.

So for lower savings <£10k a year it's probably better to compare 5% is 5%. For higher savings let's say £100k not split into multiple ISAs you can average to 3%.