Is it better to pay off your mortgage or save?

At last, our bills aren’t rising as dramatically as they were. The cost of living crisis has been challenging for everyone. But with the rate of inflation falling in 2024, there’s some light at the end of the tunnel.

And that offers you two big opportunities when it comes to your finances.

1. You can plan your monthly spending with a bit more confidence of knowing how much you’ll need. Over the last couple of years, forecasting the cost of things like your big food shop and energy bills hasn’t been easy.
2. You can start to look more to the future. At your longer-term financial needs. And the lifestyle you want to achieve.

If you’re in the welcome position of having spare money after paying your bills, this could be a good opportunity to think about your future you.

This is something that a lot of our members are asking about right now. We are very aware the last few years have been tough for so many of our members. But with UK consumer confidence on the rise, and people feeling more positive about their disposable income, the pressure is easing.

So, if you feel able to turn more of your attention to your long-term future, there might be opportunities to start making stronger plans.

What should be your financial priority?

A question that we get from a lot of our members is whether it’s better to save or pay off their mortgage sooner.

The latter typically means overpaying on your mortgage. Where instead of simply paying the agreed monthly amount, you make larger repayments or pay a one-off lump sum (check the terms of your mortgage contract). This could mean you become mortgage-free quicker – and have more spare money in the future.

This greater financial freedom could be significant. For example, it might allow you to retire earlier.

But on the flip side, if you don’t have much in savings, pensions and investments, your future options might be weaker. For example, if you’re not building up sufficient provisions for retirement, you may not be able to stop working – even if you’re mortgage-free.

They are some tricky dilemmas. But don’t worry, as help is available. First, let’s explore your choices a bit deeper, to help you decide what might be right for you.

Is it worth overpaying on your mortgage?

There’s no doubt that overpaying on your mortgage could save you money in the long-term. And you'd be surprised how much even a small regular payment could save you down the line.

• Your monthly mortgage repayments cover how much you borrowed to buy your home, plus interest. The longer it takes to repay your mortgage, the more interest you will pay.
• Overpaying on your mortgage brings your overall debt down faster. This means you won’t pay as much interest and will ultimately save money.
• Always check first, as most mortgage products have certain limits on how much you could overpay your mortgage by, with penalties if you go above it. (For example, if you have a fixed rate mortgage with Skipton, you can overpay up to 10% of your original loan amount each year. This limit resets annually on the anniversary of your mortgage end date.)
• You can overpay on your mortgage, or make a contractual change to your term to ensure this is paid off by a certain time – when you retire for example.

It’s predicted that mortgage interest rates will fall over the next few years. Depending on the terms and type of mortgage you have, this means your monthly repayment amount could fall in the near future.

So this could be a good opportunity to start overpaying your mortgage, without committing more money each month.

Let’s say you’re paying £1,000 a month now, and your mortgage repayment goes down to £850. As you’re used to paying £1,000, you could choose to overpay by £150 a month (and keep paying £1,000 a month). You’re not spending any more than you are now, but you’re paying off your mortgage debt quicker.

Is it better to save or pay off your mortgage?

There are lots of important benefits to saving.

• It gives you pots of money you can use for future needs – especially useful for goals that cost more than your typical monthly incomings and outgoings leave you with.
• It gives you a financial cushion if something unexpected was to occur. For example, if you were to lose your job or receive a large bill.
• You can earn interest on the savings you build up, which means your money is worth even more in the future.

You just never know what the future might hold, so we would always recommend you have savings in place. Whether it’s to fund a future holiday, a big purchase like a car, or simply to have greater security.

Saving could boost your wellbeing – and your financial resilience.

Use our special savings calculator to work out the impacting paying in different amounts could make.

Should I overpay on my mortgage or save?

This is a difficult question to answer, as it depends on your individual circumstances. It’s definitely worth speaking to us for an in-depth discussion about your situation – more on that later.

As a starter, here’s what to consider:

• Check your current mortgage rate to see how it compares to rates available on savings accounts.
• If your mortgage rate is higher or similar to the savings rate you’re looking at, overpaying your mortgage is likely to make greater financial sense.
• If the savings rate is higher than your mortgage rate, it might be better to prioritise saving for the future.
• It’s worth factoring in any tax you might have to pay on your savings, as this might reduce how much interest you earn.

I can’t stress enough how important your personal situation is to all of this. For example, if you already have a decent amount of savings, overpaying your mortgage could be a sensible next step to boosting your future. But if you don’t have much put away for your future goals, it might make more sense to focus on building up your savings now.

Should I overpay on my mortgage or pay more into my pension?

This is a great question! As I said earlier, becoming mortgage-free quicker might mean you can retire sooner than you expect – but it won’t help if you don’t have enough in pensions to fund it. I can’t give financial advice myself, but at Skipton Building Society we have a team of advisers who are experts in this area.

There are some excellent tax incentives for paying more into a defined contribution pension.

• You receive at least 20% tax relief on what you pay in.
• If you’re a higher or additional rate taxpayer, you can claim tax relief of 40% or 45% respectively.
• Your contributions are invested on your behalf, with the aim of growing them even further. So it’s a great way to grow money you can commit to your financial future.
• You can’t access your pension until you’re 55 (rising to 57 in 2028). Only a maximum of 25% is tax-free to withdraw (capped at £268,275). The rest is taxed in line with income tax bands.

Hopefully you’re paying into a workplace pension. This usually comes with the extra bonus of your employer paying in too.

It all depends on your circumstances. But making the most of your pension could be an effective way of growing any spare money you have. And best of all it could give your retirement prospects a major boost.

Find out how your plans stack up. We offer a free pension health check service to our members.

Should I overpay on my mortgage or invest?

Whilst it’s usually better to pay off debts, another good option for the future might simply be to invest, providing you are comfortable taking some risk with your money.

This is an especially important area to think about right now. Interest rates coming down is good news for mortgages, but less so for savings. So if you want to grow your money for the future, investing could be right for you.

Use our investment calculator to find how investing could help you grow your money – and the potential returns you could achieve.

Overpay mortgage or save? We’re here to help

Some conversations can be tricky. But talking about your finances doesn’t need to be one of them. With our My Money Review service you can get specialist advice that could help your money go further.

• You can sit down with experienced colleagues to talk about your short, medium and long-term goals for your money.
• We’ll provide recommendations for making your money work harder.
• This could include a conversation around potentially overpaying on your mortgage or saving for the future.
• If needed, we will arrange for you to speak to one of our qualified mortgage or financial advisers.

Best of all, it’s a completely free service! That’s right, you don’t have to pay a penny to have someone talk through your plans and to give you recommendations personal to you. There’s no pressure to act either. So you can have all the information you need – free of charge – before deciding your next steps.

Start your conversation now.