My mortgage rate is 4.8%. Every pound I overpay earns a guaranteed, risk-free 4.8% return. The FTSE All-World averages around 8–9% annually — but that's not guaranteed, and after charges and tax, the gap narrows significantly. Here's how I decided what to do.
The break-even analysis
The key question is simple: is your mortgage rate higher or lower than your expected after-tax, after-fee investment return?
The 10% rule and Early Repayment Charges
Most UK fixed-rate mortgages allow you to overpay up to 10% of the outstanding balance per year without penalty. On a £200,000 mortgage, that's £20,000 — more than most overpayers need. Check your mortgage offer or call your lender to confirm your limit.
Overpay beyond 10% during a fixed-rate deal and you'll face an Early Repayment Charge — typically 1–5% of the amount overpaid. In almost all cases, the interest saved doesn't justify the ERC penalty. Wait until your deal ends.
Overpay vs pension: the case for pension first
One argument often overlooked: pension contributions come with income tax relief. A basic-rate taxpayer contributing £100 to a SIPP receives an extra £25 in government tax relief, making their effective contribution £125. That 25% uplift before any investment return makes pensions extremely powerful.
If your employer offers matched pension contributions and you're not at the match limit, always contribute there first — it's an instant 50–100% return on your money.
Practical approach for 2026
- Contribute enough to your workplace pension to get full employer match
- Maximise ISA contributions (£20,000/year) — growth is tax-free
- Overpay mortgage up to 10% ERC-free limit if rate is above 4.5%
- Any remaining money into additional SIPP contributions for tax relief
The exact balance depends on your mortgage rate, marginal income tax rate, time to remortgage, and personal risk tolerance. Use our mortgage overpayment calculator to see the numbers for your specific situation.