Should I overpay my mortgage?

If you have extra money to spare, you could make overpayments on your mortgage. This can reduce the amount you pay and shorten your mortgage term, but is it right for you?
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Should I overpay on my mortgage

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

Making overpayments can also mean you pay off your mortgage much quicker. Overpay by enough and you could repay your mortgage several years faster.

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.

How much could you save by overpaying your mortgage?

You can quickly check using our simple overpayment calculator. You overpay your mortgage monthly or through a lump sum payment.

Enter the monthly or lump sum overpayments you want to make, and we'll show you:

  • How much quicker you could finish paying off your mortgage

  • How much money you could save in interest

Making overpayments could save you much more money than you earn from your savings, unless interest on your savings account (after tax) is higher than your mortgage rate.

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.

How to make a mortgage overpayment

How much can you overpay?

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

This is usually 10% of your remaining balance, but some deals are stricter and some 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 you make 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 balance)

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

How to overpay

It's usually easiest to phone your lender when you make your first overpayment. This means you can check the limits and fees before you pay them by debit card or bank transfer.

You can also ask how you can make further overpayments, such as by standing order, bank transfer, in a branch or by phoning them each time.

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 could go into a savings account 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.

Should you use your savings to pay off your debts?

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.

Compare repayment mortgages here

Save some money for emergencies

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.

Use an online overpayment calculator to find out 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.

If you're a first time buyer or looking to move house or remortgage, we can help you find the best mortgage deal to suit your needs.

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