Personal finance expert has been answering the most common question he gets asked right now
Martin Lewis has responded to the question he is currently asked more than any other — and it centres entirely on savings. Appearing on ITV’s This Morning, the personal finance guru said people are increasingly concerned about their mortgages, but are uncertain whether it is better to pay them off or put their money into savings instead.
The crux of the issue lies with interest rates, which are pushing mortgage costs ever higher while simultaneously offering improved returns on savings. TV presenter Ben Shephard asked: “So that question that you get asked more often than anything. Should I overpay? If someone is lucky enough to have some savings and the opportunity to do something like that, should they overpay?”.
Martin explained that times are difficult and many people are attempting to stretch their money further: “Whenever I talk about savings, people go, who’s got savings? I mean, just report from Bank of England today, an extra £4.7 billion has just been put into savings.
“In the pandemic alone, £150 billion. We have over a trillion quid worth of savings in this country. This is not a small issue and it’s why we get more questions about savings and debt when we do the open phone it. So that’s why I wanted to cover the subject.”
Mr Lewis said that before taking any action, people must establish their greatest financial priorities and identify where savings could be made. He explained: “First thing you do if you’ve got other expensive debt, you know, credit card debt, a loan that’s expensive that you are allowed to overpay without penalties.”
“You want to clear those before you’re clearing your mortgage because their interest rate is high. So, we’ll start with that.”
Beyond tackling costly debt, he explained that people then need to weigh up savings against their mortgage. He said: “The next question is – if your mortgage rate is higher than the after tax rate you can earn in savings, you would in principle want to overpay your mortgage rather than save.
“If you can earn more in savings than your mortgage rate is costing, then in principle you would probably want prefer to save than overpay your mortgage. Because overpaying your mortgage is effectively like saving at the mortgage rate.
“Let’s do it really simply. You’ve got £1,000 in the savings account at 4%. You’re going to earn £400 a year, although it may be taxed. You’ve got £10,000 of debt on your mortgage at 6%. It’s going to cost you £600 a year. Overpaying the mortgage has the effect of saving at the mortgage rate. That’s why the easy comparison. Although I would go on to a mortgage overpayment calculator to check. Um, and just to to put this into context, if you were to overpay £200 a month on your mortgage on a 5% mortgage with a 20-year term, you would clear it four years early and save £30,000 in interest.”
Inflation is widely expected to continue climbing in the months ahead as elevated energy costs work their way through the system, with households facing an approximate 4% increase in the energy price cap from next week. The Bank has forecast that inflation will rise to roughly 3.7% in the fourth quarter of this year and 4.2% in the first quarter of 2027.
He outlined a straightforward ‘rule’ for making the decision: “There’s a simple rule of thumb here. If your mortgage rate is higher than the after-tax rate you can earn on savings, you’re generally better off overpaying the mortgage. If your savings rate is higher than you’re paying on your mortgage, you’re generally better to save.”
