Which mortgage to use savings on

[Ohreallynotok]

Not sure which way round to do things and would appreciate any wisdom in this.

We have X2 mortgages one is £12,000 and will be up in April moving from 2% to 5.5% we can only over pay this mortgage by £1500 per year.

We have our main mortgage of £83,500 which is up in Nov 2025.

We already overpay £500 pm off the main mortgage and are able to pay off £13500 per annum without incurring costs on this mortgage.

My question is, we have enough saved to pay off the £12,000 come April (£65 fee) which would only leave us with the main mortgage and would free up an additional £100 to overpay on the main mortgage.
I'm leaning towards this as an option because psychologically I'd like to just have one mortgage to pay!
But would it be better to use the £12,000 to pay towards the main mortgage instead?
Given myself a headache trying to work it all out.

Many thanks in advance for your thoughts.

Overpay whichever one has the higher interest rate and factor in any extra charges

I'd pay off the £12k mortgage in April as if it's moving to 5.5% you would be probably be paying more in interest than you'd get in a high rate account. Presumably your other mortgage is at a lower rate than 5.5%?

Yes it's at 1.39% until November 2025 so if we clear the smaller one we can overpay as much as possible at least £600 a month until then. I'm hoping will end up being more around the 5% mark by then but who knows.

In that case I wouldn't be overpaying the higher mortgage at all - I'd put all of the money in a high rate savings account and then pay off the lump sum at the end of the fixed rate. You can get 6% savings rate while your mortgage is costing barely anything.

Don't overpay your main mortgage, you're throwing money down the drain. Same for your smaller one if the interest rate is also low. Above assuming that you don't and are unlikely to claim universal credit.

Save all 'mortgage overpayment money' in a designated high interest account, you'll get over 5%, especially if you move into fixes for the main account as you build lump sums.

When the smaller one is up for renewal pay it off.

When your main mortgage is up for renewal, pay down using the money you've saved, depending on comparative interest rates at the time.

This is useful - Mortgage Overpayment Calculator: Pay off your debt early?... https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

Psychologically I can understand you wanting to overpay the mortgage but it makes more economic senses to save at the moment as savings rates are higher.

I've found it difficult to get my head around overpayments vs savings too, recently. Because up until this year, it was always better to pay off a mortgage as savings interest rates were so low. But savings rates are better now, so saving is the way to go while your mortgage interest rates are lower.

But... it's never that simple of course as you might need to pay tax on your savings, and savings might affect any benefits you claim. Also, having debt can weigh heavily on your mind. This shouldn't be underestimated especially if you are anxious about it.

In your situation I'd pay off the smaller loan with a lump sum in April. Get rid of it and feel better about it. Then with the larger mortgage, I'd overpay a little, and save a little. It won't be what most people would advise as you can make a few extra pounds if it all went into savings. But for me, knowing that I was actively reducing my debt, would be more valuable. And the increased savings would make me feel happier in case we needed to dip into them to make a payment one month.

What interest rate is each mortgage and the savings account?

Put money into whatever has the highest interest - possibly the savings account?
Reevaluate hen the first one comes up for renewal. Although psychologically I'd psychological off the small mortgage at that point.

I've found it difficult to get my head around overpayments vs savings too, recently. Because up until this year, it was always better to pay off a mortgage as savings interest rates were so low

But mortgage rates were also very low. Between about 2008 and 2021 we almost never paid above 1% but were getting up to 5% on current accounts and regular savers so that's where our spare money went until interest rates rose. So we fully covered our mortgage interest by having about a quarter of the balance in savings.

@BarbaraofSeville which bank offered 5% interest on current accounts (or savings for that matter) between 2008 and 2021?

Most never earn enough in interest to pay tax

Allowed 1k interest if basic rate tax payer or £500 if higher rate tax. If near the threshold use an instant access isa and then don't pay tax

Store the money in a savings account earning higher interest than the mortgage interest then in April pay of the mortgage that jumps to 5%

@Destiny123 yes thanks for the clarification, and that's why I said 'might', not 'will'. Some people might need to pay tax on their savings and so it's worth mentioning, especially if the advice from most people is to save money into the highest interest paying savings account, not the highest paying ISA. Or premium bonds which are also tax free, but no guaranteed return.

Thanks everyone

To clarify a few points
The savings are already in a higher interest account and the plan will be to take that out in April and pay off the smaller mortgage entirely.

We could stop the overpayments off the other one and at lump sums so that would be something to think about, the thing is I'd worry that we would end up using it on occasions rather than adding to another lump sum so may continue to overpay that one anyway.

I was more wondering if we should be paying off the smaller one or reducing the capital on the larger loan.

Definitely pay off the smaller mortgage in April. It will be a psychological boost and maximises the buying power of your money.

WRT the bigger mortgage focus on what makes sense to give you the lowest capital in Nov 25. You know you can overpay £13,500 each year which is £27,000 by November 2025, chose which method best suits your savings style plus the respective interest rates.

Personally I would round up monthly payments and then save the rest in a high interest account. Then at the end of each year repay the remainder of the £13,500. However, if you really feel you will be tempted to dip into your savings go for higher monthly repayments.

I would also consider how much you could save to make an additional capital repayment when you remortgage. By Nov 2025 the £83,500 less £27,000 = £56,000 but you will also have made capital repayments each month so you are probably looking at c£50,000 to remortgage. Making a further capital repayment at this stage will make a big difference.

What you have to remember is overpaying and capital repayments save you money in the long run as they significantly reduce the total amount of interest you pay. This saving can then be used to boost savings but also to pay for luxury expenditure. It’s amazing what a difference owning your home outright makes.

HTH