Should I use my savings to overpay my mortgage?

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Q I am in the fortunate position of having managed to save a reasonable amount of money this summer and I have also got a new job with a decent pay rise. Would it be more sensible, given where interest rates are, for me to use my savings to overpay on my mortgage? I am two years into a five-year mortgage deal fixed at 2.1% and each year I am allowed to pay off 10% of the 27-year-term mortgage.

I live in a two-bed flat in London without a garden, so currently it is likely that the flat’s value may have dipped slightly, but I envisage being here for probably the next five years.

A Yes, it does make sense to overpay your mortgage within the limits set by your lender. Even though the fixed rate of interest you are paying is low, it is still more than double the interest you could earn on the most competitive savings accounts unless you are prepared to commit to regular saving. At NatWest and Royal Bank of Scotland, for example, your regular savings could earn you 3%.

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However, using your summer savings to overpay your mortgage may not be a good idea if you don’t have other savings to fall back on in an emergency and/or you have other non-mortgage debts.

As a general rule, you should aim to clear debts and then build up an emergency fund equal to six months’ after-tax pay or even as much as a year’s worth. If you decide that it would be a better idea to keep your savings for future financial emergencies, there may still be scope for overpaying your mortgage. Instead of using your savings – and if your lender allows it – you could make regular overpayments using the extra money you are getting with your new job. If your lender only allows one lump-sum overpayment a year, the alternative would be to use your pay rise to build up more savings in a regular savings account.

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