Britons could cut up to five years off their mortgage without dipping into savings

Homeowners could slash thousands of pounds from their mortgage costs without sacrificing their savings.

Experts say using tax-free ISA interest to make overpayments could cut years off a mortgage term and bring retirement plans forward.

Katie Horne, savings expert at Flagstone, told GB News: "A mistake a homeowner might make when overpaying their mortgage is putting too much disposable income towards servicing the debt and not leaving themselves with enough readily accessible cash for unforeseen expenses or emergencies..

"However, the beauty of this strategy is that you only use the tax-free interest earned on your savings to overpay your mortgage. Your actual savings needn’t get touched at all."

Research from Flagstone suggests the idea could resonate with millions of homeowners. Seven in 10 (71 per cent) mortgage holders say they want to pay off their mortgage as quickly as possible, while more than half (51 per cent) are more focused on reducing mortgage debt than increasing their savings.

Among Generation Z, this rises to almost two-thirds (63 per cent).

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Yet many homeowners feel they are being forced to choose between the two goals.

Ms Horne said: "When it comes to long term financial planning, most of us believe that we have to make a choice: either overpay our mortgage or build up our savings. In reality, that decision isn't as stark as it seems - particularly when your savings are held in a tax-free Cash ISA."

Around three in five (61 per cent) mortgaged homeowners cannot afford to retire until their mortgage is fully paid off.

The concern spans generations and income brackets, with many homeowners saying they cannot afford to retire until their mortgage has been fully repaid.

Ms Horne said: "61 per cent of UK mortgaged homeowners say that they can’t afford to retire until their mortgages are paid off.

"Anything that enables more mortgaged homeowners to chip away faster at their mortgages while continuing to save and prepare for their retirement is commendable.

"For those whose mortgages are their last outstanding financial obligation before retirement, overpayments could be the key to reaching retirement age sooner."

She explained that consistent overpayments that shorten the term by even a year or two could potentially bring forward retirement plans or reduce financial pressure later in life.

Flagstone's analysis demonstrates how the strategy could work for a typical homeowner. The average UK adult has outstanding mortgage debt of £261,053 and savings of £20,600.

Using a worked example, Flagstone modelled a homeowner with 25 years remaining on a mortgage fixed at 4.5 per cent and monthly repayments of approximately £1,450.

If their £20,600 savings were placed in an easy access Cash ISA paying four per cent interest, the account would generate around £824 a year in tax-free interest, equivalent to roughly £69 a month.

Using that interest to increase mortgage repayments would raise payments from £1,450 to £1,519, an increase of nearly five per cent.

After three years, the homeowner would still have their full £20,600 savings pot while reducing their outstanding mortgage balance by around £2,500 more than somebody making standard repayments alone.

Ms Horne said: "Even relatively modest overpayments, when made consistently, can significantly reduce both the term and total interest paid. Using savings interest to fund those overpayments allows borrowers to do this without eroding their financial safety net.

"The larger the savings pot, the bigger the opportunity you have to maximise your savings interest and increase the amount by which you overpay your mortgage month to month, or year to year."

If maintained throughout the full mortgage term, annual overpayments of £824 could shorten the mortgage by around two years and cut total interest costs by approximately £17,000 to £20,000, depending on lender calculations.

The benefits become even greater for those able to add to their savings each year.

Flagstone modelled a scenario in which the average homeowner added £5,000 annually to their savings.

After ten years, they would have built an untouched tax-free savings pot worth £65,600, be making mortgage overpayments of around £220 per month and have reduced their outstanding mortgage balance by approximately £17,200 compared with someone making no overpayments.

Ms Horne said: "Using the interest you earn on tax-free savings to overpay your mortgage can have a hugely positive impact on practically anyone who doesn't want to whittle away their savings, but also would love to see off their mortgage that bit faster."

For wealthier borrowers, the savings can be even more dramatic. Someone with a £500,000 mortgage and £100,000 in cash savings could generate £4,000 a year in ISA interest, equivalent to around £333 per month.

Using that interest to overpay their mortgage would increase repayments by nearly 13 per cent. After three years, they would still have their full £100,000 savings while reducing their mortgage balance by roughly £12,000 more than someone making standard repayments.

Over the full mortgage term, the strategy could shorten the repayment period by around four to five years and reduce interest costs by between £55,000 and £60,000.

However, Ms Horne warned homeowners not to become overly aggressive with overpayments at the expense of financial security.

She also stressed the importance of maintaining access to savings, noting that the highest-paying ISAs are often fixed-rate products that require money to be locked away.

"It's important to ensure that when picking which ISAs to use, some of your funds remain easily accessible in either short-term fixed term or easy access ISAs in case you need access to these funds quickly," she said.

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