Overpay the 5.63% Mortgage, Not the 5.29% Gilt — One of These Returns Is Guaranteed

The 10-year gilt rose above 5.29% on 2 September, the highest for 19 years, as a global bond sell-off pushed UK borrowing costs up. The Bank of England's daily yield curve shows how far the market has repriced in weeks, not years. Our rate-cycle explainer tracks what that repricing means for borrowers.

A mortgage overpayment at 5.63% returns 5.63% — tax-free, because money you do not pay in interest is not income. There is no counterparty, no bid-ask spread, no daily mark-to-market. The gilt's 5.29% is a redemption yield: you only get it in full if you hold to maturity, and its coupon is taxable as income at your marginal rate. A higher-rate taxpayer has a £500 Personal Savings Allowance — and a gilt coupon above that allowance attracts 40% tax.

The gap looks small on a label. Run it over a 25-year mortgage term and it compounds into tens of thousands of pounds, with the added difference that one return is guaranteed and the other is not.

Buying a gilt adds an asset. Overpaying your mortgage removes a liability. Those are not the same transaction with different labels; they move your net worth in opposite directions on risk.

A gilt's price can fall. If the Bank of England hikes — and chief economist Huw Pill spent Thursday arguing it should, as one of three MPC members who voted to raise rates in July — the 10-year gilt you bought at 5.29% is worth less the day after. Hold to maturity and you get your capital back; but the price volatility is real, and the long end of the curve is where the damage concentrates.

An overpayment has no price. Your lender cannot mark down the £10,000 you have repaid. It reduces the loan, it reduces the interest that accrues, and it lowers your loan-to-value — which in turn prices your next remortgage, as our remortgage explainer sets out. Lower LTV is the difference between the best available rate and the lender's worst. That is a second, compounding benefit a gilt cannot touch.

Most fixed-rate mortgages allow you to overpay up to 10% of the outstanding balance each year without early repayment charges. Within that allowance, the only cost of overpaying is the cash itself — which is exactly what our overpayment guide demonstrates with the 4.92% example from earlier this year.

Run one number. Overpay £10,000 on a 5.63% mortgage and you save £563 of interest in the first year. Because the balance never climbs back, the saving repeats every year and compounds. Hold the mortgage for 20 more years and that single £10,000 overpayment avoids roughly £20,000 of interest.

The same £10,000 in a 10-year gilt at 5.29% earns £529 a year, taxed on the coupon, and returns your principal in 2036 at a price the market — not your contract — decides in between.

The overpayment's illiquidity is doing £20,000 of work. That is the part the liquidity argument never prices. And unlike a gilt, the overpayment does not ask you to guess whether rates are peaking before you commit.

The standard reply is that a gilt keeps your money liquid while an overpayment locks it into the house. True — and irrelevant for money you do not need.

Emergency fund first: six months of outgoings in easy access, which currently pays around 4.5% at the top of the market. The savings hub covers where that cash belongs. After that, the cash you are choosing between is surplus. If you genuinely might need it next year, do not buy a 10-year gilt either — sell it at the wrong moment and you can lose capital. Liquidity is not a property of the gilt; it is a property of the holding period. A gilt held to maturity is just as locked as an overpayment, except it pays less and can still be sold at a loss in a panic.

The overpayment's illiquidity is a feature when the alternative is a security whose price you would watch daily. It removes the option to do something foolish at the bottom.

The gilt's defenders lean on one fact: gains on gilts are exempt from Capital Gains Tax under section 115 of TCGA 1992. Buy a low-coupon gilt below its £100 face value and most of your return arrives as tax-free capital gain.

That is true, and it narrows the gap — but it does not close it. The mortgage overpayment is already 100% tax-free, with no need for a low-coupon selection and no holding-period caveat. The gilt still carries a taxable coupon, still carries price risk if sold early, and still yields 0.34 points less to begin with. For a 40% taxpayer, a gilt at 5.29% is worth marginally less than 5.29% after tax; the overpayment is worth exactly 5.63%.

That monthly series ends at 4.80% in June. The 5.29% September spike is the point: gilt yields are a moving target, and buying the high is a timing bet. Overpaying the mortgage is indifferent to all of it.

Be honest about the exceptions. If your mortgage is fixed below 2% from 2022, do not overpay — park the cash in a gilt or a fixed-rate bond and keep the spread. If you have not used your ISA allowance, the ISA hub should come first: a cash ISA at 4.5%-plus beats both once tax is considered for most savers. If you are clearing a small balance within a few years, finish it, as our clear-the-mortgage guide argues. And if you are close to retirement and want a guaranteed income stream, the 15-year gilt yield at a 28-year high is why annuities now pay over £8,000 a year per £100,000, as the Guardian reports.

None of those is the common case. The common case is a borrower on a 5%-plus fixed deal with spare cash and a savings allowance already spent. For them, the mortgage hub comparison is settled by one number: 5.63% guaranteed beats 5.29% speculative.