Why overpay?

Overpaying on your mortgage can save you money by reducing the size of your mortgage and the amount of interest you'll pay overall.

You can either make regular monthly payments over your normal amount, or make a one off lump sum payment.

The best mortgage deals tend to be available to those with more equity in their property. So using overpayments to increase your equity can help you get a better deal when your fixed term is up.

You could be able to save more by putting your money towards mortgage overpayments rather than saving it in a low interest savings account.

The exception to this rule is if the interest on your savings (after tax) is higher than your mortgage rate.

Most mortgages set a limit on how much you can overpay a year, for example 10% of your balance. If you want more flexibility on how much you can overpay you can use a flexible mortgage or an offset mortgage.

An overpayment example

  • You have a 150,000 mortgage with a term of 20 years, at an interest rate of 5%.

  • This would cost you 237,584 in total when paying the standard repayment each month.

  • However, add a monthly overpayment of 100, and you could cut the cost of your mortgage to 223,327.

  • This would save you around 14,300, cutting nearly 3 years off the length of your mortgage.

What are the drawbacks of overpaying?

While making overpayments can seem like a good idea, there are some points you need to check out first.

Does your mortgage lender allow it?

Some mortgage lenders charge a penalty if you pay more than your usual monthly amount, so you need to check before you start making overpayments.

If the penalties outweigh what you will save, it will be more cost effective to put your extra cash into a savings account instead.

Any money you want to use to overpay in savings until your current deal comes to an end, and you're able to make a penalty free lump sum repayment.

Are other debts costing you more?

If your other debts are costing you more than your mortgage, it would be a good idea to pay these off first before considering making overpayments on your mortgage.

Where the money goes

If you have a repayment mortgage, make sure your overpayments are going towards paying off your overall balance, not just the interest.

If you overpay on the interest, this will have no effect on reducing your mortgage cost or term.

If you have an interest only mortgage all your payments will only be going on your mortgage interest. In this case, if you want to make overpayments, you will need to discuss this with your lender.

Don't put all your eggs in one basket

If you use all your available spare money to make overpayments, most mortgages won't let you get your money back if you need it. So it can be a good idea to keep some back in savings to cover unexpected expenses.

However, if you have a flexible mortgage, you may be allowed you to make overpayments but borrow the money back if and when you need it.

When is interest calculated?

If you decide to overpay, you should think about when your lender calculates interest on your mortgage. Your interest could be calculated:

  • Daily

  • Monthly

  • Quarterly

  • Annually

If you aren't sure when yours is calculated, contact your lender or look through your policy documents.

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 this 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.

Should you overpay?

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

However, you should work out if you really can afford to overpay first. You may decide you can afford an extra 100 or so in overpayments to shorten your mortgage term, but it is better to be realistic and consider how this will affect your finances.

Finally, always check the terms and conditions of your mortgage and speak to your lender before you make overpayments.