Worked examplesMortgage and pensions
Overpay the mortgage, or let your pension clear it?
Overpaying feels like the sensible choice. For a higher-rate taxpayer, putting the same money into a SIPP and using it to clear the mortgage at 57 can leave you thousands better off. Here's the working, including when it doesn't.
The short answer
+£16,830
ahead at 60 by paying into a SIPP instead of overpaying the mortgage.
A 40-year-old on £65,000 with £200 a month spare. The SIPP route pays more interest, and still wins.
The working
- Overpay: what you'd have at 60
- £49,609
- SIPP: what you'd have at 60
- £66,439
- SIPP route ahead by
- +£16,830
- Growth the SIPP needs to draw level
- 2.1% a year
In today's money, assuming 6.6% growth a year. Both routes cost exactly the same each month until the mortgage was due to end.
If you have a bit spare each month, overpaying the mortgage is the obvious move. It's a guaranteed return, it's tax-free, and you can watch the balance fall.
There is another route. Keep paying the mortgage as normal, put the spare money into a pension instead, and use the pension to clear what's left once you can reach it. It sounds back to front. The numbers often say otherwise.
Day one: £100 becomes £166.67
The pension's advantage starts the moment you pay in. For a higher-rate taxpayer with a personal pension (a SIPP):
£166.67
in the pension for every £100 of take-home pay, at the higher rate.
Overpay the mortgage with the same £100 at 4.5% and you save £4.50 of interest a year.
The working
| You pay in | £133.33 |
| Your provider adds 20% | +£33.33 |
| In the pension | £166.67 |
| You reclaim on your tax return | −£33.33 |
| Cost to you | £100 |
How much the head start is worth depends on your tax band:
| Your tax band | £100 of take-home becomes |
|---|---|
| Basic rate (20%) | £125 |
| Higher rate (40%) | £166.67 |
| £100,000 to £125,140 (60%) | £250 |
Two caveats. The 40% only applies to income above £50,270. And the extra relief has to be claimed and paid back in, or the head start shrinks.
The £250 line is the same effect that makes a pension payment so powerful just over £100,000, where it can also bring back a family's childcare support. Between £60,000 and £80,000, the Child Benefit charge adds to the relief in a similar way.
The scenario
A 40-year-old earning £65,000. Their mortgage is £150,000 at 4.5%, with 20 years left, so it's due to finish at 60. They have £200 a month spare.
Route 1: overpay. The extra £200 a month clears the mortgage at 55. From then, the whole £1,149 a month they were paying goes into an ISA.
Route 2: the SIPP. They keep paying the mortgage as normal. The £200 a month goes into a SIPP, where tax relief turns it into £333. At 57 they'd still owe £31,902, so the SIPP's job is to clear that.
How little it takes
Assuming the SIPP grows by 6.6% a year (what a mixed fund with 60% in shares returned over the last ten years), it has enough by age 43. That's just over three years of paying in, and £7,600 from take-home pay. After that, the £200 a month goes into an ISA instead.
At 57 the SIPP is worth about £32,479. A quarter comes out tax-free and goes straight onto the mortgage. The rest is taken over the next two years in amounts that sit inside the tax-free personal allowance. The mortgage is gone by 59, and no income tax is paid on the way out.
Head to head
Both routes cost exactly the same each month (£1,149) until the mortgage was due to end at 60, so that's where we compare them, in today's money.
| Overpay | SIPP | |
|---|---|---|
| Mortgage gone at | 55 | 59 |
| Interest paid | £56,435 | £76,314 |
| Tax on pension withdrawals | — | £0 |
| What you'd have at 60 | £49,609 | £66,439 |
The SIPP route pays almost £20,000 more in interest and still ends £16,830 ahead. Tax relief is a head start that overpaying can't match.
The growth it needs
Nobody knows what investments will do, so the honest figure is the growth the SIPP needs just to draw level. In this example it's 2.1% a year. Cash in a savings account has often beaten that.
It depends heavily on your tax band:
| Income | Growth the SIPP needs to win |
|---|---|
| £40,000 (basic rate) | 3.6% a year |
| £65,000 (higher rate) | 2.1% a year |
| £110,000 (60% band) | 0.3% a year |
When overpaying wins
A basic-rate taxpayer whose SIPP grows by 2.1% a year (a cautious fund's last ten years) ends up £4,271 better off overpaying.
Overpaying is also the better choice if:
- you'll need the money before 57, the earliest you can reach a pension (55 until April 2028);
- you don't have an emergency fund yet;
- a smaller mortgage would get you a better rate when you remortgage;
- you'll still be earning a good salary at 57, so the withdrawals would be taxed at 40%.
That last one matters. In our example, if they were still earning £65,000 at 57, the withdrawals would cost £14,725 in tax and the SIPP route's lead would shrink to about £10,900.
Not every debt is worth clearing early
A mortgage is a debt you will repay in full, so every pound overpaid saves interest. A student loan often isn't: for many graduates, overpaying only shrinks the amount that would have been written off. Should you overpay your student loan? shows how to tell which kind yours is.
General information, not financial advice. Past returns don't predict future ones, and investments can fall as well as rise. Assumes 2026/27 tax rules for England, Wales and Northern Ireland, tax bands rising with inflation, and a fixed mortgage rate. Speak to a regulated adviser before acting.