I've got a mortgage in the UK with a 5 year fixed rate of 1.69% that expires in Dec 2025 and started in May 2021. I've decided to pay it as soon as possible and I'm trying to figure out what's the most efficient way to do that. Every year I'm allowed to overpay 10% of the outstanding balance with the fees for overpaying on top of the 10% being 5% in the first year, 4% in the second, etc. Given that, I'll definitely be able to save more than 10% of the outstanding balance every year, should I overpay all my savings immediately and pay the penalties or should I put my savings over 10% in a savings account and pay them after the 5year product expires?

Just doing the math, if I overpay at the start of the 2nd year, I'd be saving around 4 years of interest 1.69^4=8.15, so in theory I should save 8.15%-4%=4.15% on the extra money I overpay. Following this logic however, it seems less worth overpaying extra after that (3rd year is 1.69^3-3=1.8%, 4th year - 1.69^2-2=1.38% and 5th year - 1.69-1=0.69%) since I might be able to find a savings account/invest in a low risk index fund and get a better return. Is that a correct assumption?

Also, every time I overpay, my monthly payment is reduced, so that the original term doesn't change. With that in mind, should I overpay regularly, e.g monthly, or save and pay in a lump sum at the end of each year? I can't figure out which would reduce the outstanding balance faster.

• Follow the math!! Feb 23 at 2:41
• @RonJohn I think the question here is essentially "how do I do the math?" Feb 23 at 2:54
• "every time I overpay, my monthly payment is reduced," - typically with a UK mortgage provider, a fee-free overpayment such as you describe can at your choice be used to either reduce term or reduce monthly payment. It will discuss this in your mortgage agreement Feb 23 at 8:58
• @yoozer8 UK mortgages are typically products structured as a short (1-5 year) term with some kind of rate certainty (a fix, a cap, a discount to the base rate, etc), followed by the remaining term of the mortgage on the lender's Standard Variable Rate (which is up to the lender's commercial choices, but typically floats some percentage points above the Bank of England base rate). Usual consumer behaviour is to be on such a deal then switch to a new one at the end of the product term. While on the SVR, there are (again typically) no penalties for overpayment. Feb 23 at 9:03
• Have you asked your mortgage provider? Notwithstanding what it says in the contract, there may be alternatives that they can offer, and there's nothing to lose by asking. Feb 23 at 9:22

The best way to analyse any given overpayment is by comparing it with the most similar possible alternative at the time.

Let's take your possible overpayment with 4 years left on the mortgage. Let's also assume you have some ISA allowance left.

For the 4 years until your mortgage fixed rate expires, you could take out a fixed rate ISA. That has exactly the same level of risk as the mortgage overpayment in that the return isn't dependent on any interest rate changes.

Searching right now I see rates of around 1.50% available. Your return on that money would be `

`(1.015)^4 - 1` ~= `0.061` = `6.1%`.

With the mortgage overpayment, you would lose 4% right away so your notional return is

`0.96*(1.0169)^4 - 1` ~= `0.027` = `2.7%`.

So if you have ISA allowance available, you have a clearly better alternative to the overpayment. That doesn't mean you should do that, maybe there's some better option than the fixed-rate ISA, but I would say you certainly shouldn't overpay.

If you don't have ISA allowance available, then you can still get a 4 year fixed rate account, but you might have to pay tax on any interest depending on a few factors like how much you earn and how much interest you get in total across all your savings. In fact it seems that the non-ISA fixed rates are significantly higher than the ISA fixed rates - currently 1.95% is available so it seems likely that even after tax you'd also be better off than the mortgage overpayment.

When you come to considering the overpayments in later years, you can do similar analyses based on the rates available at the time.

• Savings rates (UK) must have improved quite a bit recently. When I last checked I couldn't do much better than about 1.2%, and that with hassles or for a longer fixed term than I wanted, so started making regular mortgage overpayments instead of regular additions to my savings. Feb 24 at 17:10
• @ChrisH interest rate expectations will be heading up quite a bit given increasing inflation Feb 24 at 19:49
• That's true. I'm not in a position to take out anything medium term for a little while, so was looking at instant access to 1 year, and that was a month or two ago Feb 24 at 20:23