Should I overpay my mortgage?

How much will I save by overpaying my mortgage?

The savings you will be able to make will depend on:

• How long you have left on your mortgage

• The size of your remaining mortgage balance

• The interest rate you’re paying

• How much you overpay by

An easy way to check how much you could save is by using our simple mortgage overpayment calculator. Using our calculator, here's an example using a £200,000 mortgage over 25 years at 5% interest:

How to make a mortgage overpayment

It’s usually easiest to phone your lender when you make your first overpayment. This allows you to check whether there are any limits on how much you can overpay. You can then make your payment by debit card or bank transfer.

You can also ask your lender about the best way to make further overpayments, such as by:

• Standing order

• Bank transfer

• In a branch

• Phoning them each time

When you make overpayments, you may be asked if you want to reduce next month’s payment by the amount you’ve overpaid or keep your payments the same and reduce the term of your mortgage. 

It's always best to say you want to reduce the term of your mortgage as this will save you much more in interest. If your overpayment goes towards reducing next month’s payment, you won’t save anywhere near as much. 

How much can I overpay on my mortgage?

Most mortgages set a limit on how much you can overpay, especially on fixed, tracker and discount mortgage deals.

This is usually 10% of your remaining balance each year. However, some lenders and deals are stricter while others are more flexible.

If you go over this limit, your lender might make you pay an early repayment charge (ERC), which can also apply if you pay off your mortgage early.

Before making any overpayments, find out the limits and fees by asking your lender, checking your paperwork or looking online.

If you want to avoid paying the ERC, make sure:

• Any lump sum overpayments you make are below the limit (e.g. 10% of the remaining balance)

• The total monthly overpayments you want to make are below the limit

When is interest calculated?

If you decide to overpay, you should consider when your lender calculates interest on your mortgage. It could be calculated:

• Daily

• Monthly

• Quarterly

• Annually

Contact your lender or look through your policy documents if you aren’t sure when yours is calculated.

If your interest is calculated daily, you can make overpayments at any time, and the extra amount paid won’t be affected by the mortgage interest rate.

However, if your interest is calculated monthly, quarterly or annually, it’s worth finding out exactly when to maximise the benefit of overpaying.

As money put towards your mortgage is only counted after interest is calculated, you should try to time it so that your overpayments aren’t applied too early.

Try to make your overpayments a day or so before interest is calculated. If your interest is not due to be calculated for a few months to a year, it could be worth putting your extra money into a high-interest savings account before it is applied to your mortgage.

What are the benefits of overpaying?

Overpaying on your mortgage can be a smart financial move for a few reasons:

• Save money on interest - By reducing your outstanding balance faster, you’ll pay less interest overall and could shave years off your mortgage term.

• Better returns than savings - Unless your savings account pays a higher interest rate (after tax) than your mortgage, overpaying will likely save you more money than you’d earn by leaving that cash in the bank.

• Unlock better mortgage deals - Lenders often reserve their best rates for borrowers with higher equity. Overpaying increases your equity and can help you access lower rates when your current deal ends.

• Get closer to owning your home outright - Every extra payment puts you one step nearer to being mortgage-free.

What are the drawbacks of overpaying?

While overpaying has clear advantages, there are some important points to consider before committing extra cash to your mortgage:

• Lender rules and penalties - Some lenders cap how much you can overpay each year without incurring a fee. If the penalty is higher than your potential savings, it may not be worth it.

• Other debts might take priority - If you’ve got higher-interest debts (like credit cards or personal loans), it usually makes more sense to pay those off first.

• Repayment vs. interest-only mortgages - With repayment mortgages, overpayments reduce your balance and interest. But on interest-only mortgages, they only cover interest unless you agree another arrangement with your lender.

• Tying up your money - Once you’ve overpaid, you usually can’t get that money back. That means you could be left short if an emergency comes up. Some flexible mortgages let you borrow back overpayments, but not all do.

• Savings vs. overpayments – Instead of overpaying straight away, you might prefer to keep the money in a savings account until your fixed-rate deal ends, then make a lump-sum payment without penalties.

Is it worth overpaying on your mortgage?

If you can overpay on your mortgage without paying a penalty, it can help you save money in the long run while interest rates are so low.

Use an online overpayment calculator to determine how much you could save and how much quicker you could pay off your mortgage.

Work out if you really can afford to overpay, and consider how this will affect your finances. Always check the terms and conditions of your mortgage and speak to your lender before you make overpayments.