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Paying down your mortgage could very well be the best use of savings at the moment.

Wondering what to do with that little nest egg you have put aside? Have you been put off by current savings rates?

Until 6 months ago, savers could expect in excess of 5% on interest rates on regular savings accounts. That figure is now more likely 2%, or even less.

While some people now have access to very low interest rates on their mortgages, many people are still locked into higher fixed rates that they took out as little as 6 months ago.

Many mortgages allow borrowers to overpay the capital owed. Quite often, borrowers are permitted to overpay the outstanding mortgage balance by 10% per annum, without penalty.

Even if you have penalties for overpayment, it may still be worth while overpaying, depending on the severity of the penalty and the time remaining on your fixed rate.

For details, you can either look at the original illustration provided to you by your broker or lender, or the offer document provided by your lender. If you cannot find these documents, the lender should be able to send you a copy.

If the best savings rate you can find for your circumstances is around 2%, yet you are paying 5.5% on your mortgage, the amount you overpay will effectively earn you 3.5% more than if you had invested in savings.

Paying down your mortgage is technically not investing, but rather reducing your debt. As a result, you are also not taxed on any ‘earnings’. This tax-free effect is amplified by those who are on a higher tax rate, effectively increasing the rate of return by 2 to 3%.