Overpaying mortgage vs higher interest account

[Fretfulmum]

I’ve always read that if you can put money in an account which pays a higher interest rate than the interest rate on my mortgage, I’m better off doing that and making a lump sum overpayment when my fixed deal ends. But is this really true and won’t the balance of my mortgage matter?

My mortgage interest rate is 1.9% until 2027. I can make overpayments of £30k per year until then. I don’t want to invest that money into my SS ISA /shares etc as I want it fully safe to pay off my mortgage balance. So alternatively I can put the money into a fixed rate bank savings account with 5% interest rate and then do a lump payment in 2027. Will I be better off doing it this way? Or do I need to work it out based on how much my mortgage is for?

Glad you asked this, I have a similar question so I hope you don't mind me commenting, my mortgage rate is currently 1.79% for 1 year but we owe 500k, we overpay (£300) a month (can upp this to £600 next month as my car payments end) so not large quantities in comparison to you, I could put this into an interest account every month but it would be pennies at £300/600 for 12 months, not sure what to do for the best.

Yes it’s true. It’s the rate that matters. But you also have to factor in tax on your savings interest if not in an ISA. Use a cash ISA where you can then you don’t have to worry about the tax on savings interest issue.

5% > 1.9%

People sometimes say it’s safer to pay it off the mortgage as it puts it out of reach and you can’t sudddenly decide to spend it on a nice gold necklace ;)

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As long as you definitely won’t touch it, and will use it as a lump sum to pay off your mortgage when your fixed altars expires, you will always be better saving it in the higher rate interest account

Fixed rate!

Yes, the mortgage balance is large but the only bit you are bothered about is the extra bit in savings or mortgage.
So, if you are talking about 30,000.
1.9% saves you 570 in interest a year.
5% gets you 1500 interest in a year, which you can then pay off the mortgage - you would have nearly a grand less in mortgage debt doing this way.

Thanks everyone!

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

I have been wondering this myself and found this handy calculator on MSE.

I would check how much (if any) your mortgage t&cs allow you to overpay directly onto the mortgage each year without a financial penalty.
If possible, this means that you will enjoy a de facto rate on your savings equal to the interest rate on your mortgage itself.
You do of course need to be sure that you will not need the money back as this would be a 'one way street'.