Martin Lewis shares warning to people before overpaying their mortgage

The Money Saving Expert recently shared a simple equation on his podcast to work out whether overpaying your mortgage or placing your savings in a top account is better

Martin Lewis has broken down a straightforward formula for homeowners to decide whether overpaying their mortgage is beneficial in the long term. As the Bank of England holds the base rate steady at 5% this month, savings and mortgage rates have experienced some unusual shifts.

Martin Lewis highlighted that while long-term fixes are currently falling below easy access rates, this trend might not last. Amid this volatility, a listener sought advice on The Martin Lewis Podcast, pondering whether to overpay their mortgage or stash extra funds into a top savings account.

The MoneySavingExpert founder offered a clear-cut solution. He stated on his podcast: "My rule of thumb is: if your mortgage rate is higher than the after-tax amount you can earn in savings...you are better off overpaying the mortgage."

Taking an example, Martin advised that if your mortgage interest is at 6% and a savings account offers 5%, it's wiser to opt for the mortgage. Yet, he underscored two important conditions: "1, check there are no penalties for overpaying the mortgage and 2, always give yourself an emergency fund of 3-6 months worth of bills put aside so if you were to have a problem you can still pay the mortgage."

The warning stems from the reality that previous overpayments on your mortgage don't prevent you from falling into arrears if you miss a future payment. Martin also advised: "Make sure the overpayments count as capital payments so it reduces what you actually owe rather than just reduce what you're paying on future monthly payments."

If your mortgage rate is significantly lower than your savings interest rate, the finance guru suggested putting the extra money in savings where you can be "earning substantially more saving than you are holding it in a mortgage". As remortgaging time approaches, you could also then use your savings to make an overpayment, reducing the amount you need to borrow and potentially improving your loan-to-value ratio, which could lead to a better deal.

Lastly, if the two rates are similar, with roughly a 0.1% difference as Martin pointed out, then a mortgage overpayment calculator could be useful. These can be found online and the ITV star noted: "You're probably better off overpaying the mortgage and psychologically it's better to overpay the mortgage anyway."

A number of mortgage lenders have been cutting rates as the autumn market gets begins. Iain McKenzie, chief executive of the Guild of Property Professionals, said: “The Bank of England has made some cautious progress in lowering interest rates as a result of falling inflation levels in the past year. It is anticipated that it will continue to be much of the same as the year comes to a close.”

Nicky Stevenson, managing director at estate agent group Fine & Country, said: “Lower interest rates translate to reduced monthly mortgage payments, which should attract buyers back into the market. This change offers greater flexibility in their budgets and the opportunity to consider higher-priced homes.”