Mortgage Overpayment: Is it Worth it?
Mortgage overpayment can be a way to save money in interest and be mortgage-free sooner. But first you will need to be clear about your lender’s limits and be confident that it’s the best use of the extra money.
If you’re considering overpaying on your mortgage, you will likely be looking to reduce how much interest you pay and ultimately bring forward the day you’re mortgage-free.
But before going ahead with this apparent no-brainer, it’s important to be sure that it’s the best use of the funds available for you. You’ll also want to avoid being charged fees for going over your lender's limit. So here are the pitfalls and positives of mortgage overpayment.
What is a mortgage overpayment?
When you overpay on your mortgage, you voluntarily pay more than the minimum monthly repayment amount set by your lender.
You may have the option of overpaying with a one-off or occasional lump sum, or with regular payments on top of your monthly payment.
What you can and can’t do varies across deals and lenders, so check any restrictions in your agreement before going ahead with overpayments.
Why make mortgage overpayments?
It’s a good question, especially if your mortgage payments are your biggest regular outgoing. But if you have the extra funds to hand, mortgage overpayments can be a way to clear your debt sooner, while saving money in interest.
Here’s how that could work in your favour:
- You could be mortgage-free sooner. As you will pay off more of the money you originally borrowed quicker than you first calculated, you could pay off your mortgage ahead of time.
- You could reduce how much interest you pay overall. By shortening how long it takes to pay off your mortgage, you’ll likely pay less total interest over the lifetime of the mortgage.
- You will be charged interest on a lower amount. Your monthly interest rate is calculated on the outstanding sum of the loan. As what you owe reduces over time through overpayments and your regular repayments, the interest part of your mortgage repayments will be calculated on a smaller amount.
- Your house equity could increase sooner. If you pay off more of the capital quicker, your loan-to-value (LTV) ratio will reduce. This could give you access to more competitive mortgage rates if you remortgage to another deal later on.
- It can offer you more flexibility. If it’s an option, you may be able to make overpayments as and when you want to or regularly, especially if you manage your mortgage online or through an app. This can let you overpay in a way that suits you, or not at all when it doesn’t. It’s worth remembering that typically providers only allow you to overpay by 10% each year before charging you fees.
How much can you save by overpaying your mortgage?
Overpayments could help save borrowers thousands of pounds in interest over the lifetime of a mortgage. How much you might save depends on a few variables, such as how much you’re looking to overpay and the interest rate of your deal.
The example below is an estimate of how much money overpayments might save a borrower over time.
Say you owe £100,000 on your mortgage and are paying an interest rate of 3%, with 20 years left of your mortgage term. Assuming your interest rate stays the same and you keep within your lender’s overpayment limits:
- An extra £200 as a regular monthly payment could save you £11,596 in interest over the lifetime of your mortgage and cut your term by six years and seven months.
- An overpayment of £100 a month could save £7,087 in interest over the lifetime of your mortgage and reduce your mortgage term by three years and 11 months.
- Make a lump sum payment of £20,000 and you could save £13,760 in interest and reduce your mortgage term by five years.
To work out the possible effect of making overpayments on your mortgage, try our mortgage overpayment calculator.
When you might consider making mortgage overpayments
You may be looking to pay off a large chunk of your mortgage after inheriting money or selling an asset. Or you could want to increase your monthly repayments because you’ve had a pay rise or a bonus, or are making savings elsewhere, perhaps through securing a lower mortgage interest rate.
When it comes to making the overpayments, timing is important. If your mortgage provider allows overpayments, find out when the interest on your loan is calculated. If it’s daily or weekly, you could make overpayments whenever you like without bothering too much about timing.
But if interest is calculated monthly or quarterly, you might want to be more strategic. You could aim to make your overpayments just before your interest is calculated. This may save you money, because it will be calculated on a lower loan amount. It's always worth checking how it works with your lender directly before making any decisions on when to overpay.
What to know before making mortgage overpayments
There are some important things to bear in mind before taking the overpayment route.
Check your lender’s overpayment restrictions
Not all lenders allow overpayments. But if yours does, it may have an overpayment limit in place. This is usually no more than 10% of the total outstanding debt each year, but your mortgage agreement will confirm the amount. Go above the overpayment limit and you will have to pay an early repayment charge.
Some mortgage deals, such as tracker and standard variable rate mortgages, let you overpay as much as you like without a penalty
Consider paying off other debts first
If you have other debts, such as credit cards or other loans, make sure that making overpayments won’t mean you take longer to clear these. This is especially the case if they charge a high rate of interest.
» MORE: Tips for paying off debt
Make sure you can afford to make overpayments
If you’re not confident that regular monthly overpayments would be sustainable, the flexibility of making occasional lump sum payments might be a better option. If either method would stretch your finances too far, you may be better off sticking with your original mortgage payment plan.
If you put all your extra cash into your mortgage, make sure you could still manage if an emergency expense crops up. And make sure that focusing on your mortgage debt won’t affect other important monthly payments such as your savings, investments and pension.
» MORE: How much should you put aside for unexpected costs?
Be clear what you want overpayments to achieve
Before you make overpayments, tell your lender what your goal is. For example, if you’re looking to shorten your mortgage term, you will want to ask that it keeps your regular monthly payments the same, so you are overpaying.
Otherwise, your lender may reduce your monthly payments in line with the reduced loan amount and your mortgage term will stay the same.
Bear in mind that your lender’s terms and how much you’re looking to overpay might affect what options are open to you.
Once it’s gone, it’s gone
Making overpayments on a standard mortgage isn’t the same as putting money into an easy-access bank account. Once you have overpaid, in some cases the money goes into an overpayments reserve and you can’t just withdraw the funds if you need the money. You would need to remortgage for a higher loan amount to see the money again, and pay any remortgaging fees in the process.
If you have a flexible type of mortgage, such as an offset mortgage, borrowing the money back may be an option. It’s always worth checking the terms of your mortgage before making any overpayments.
Should you overpay on your mortgage?
Overpaying isn’t the answer for everyone. While there are obvious advantages to getting your mortgage loan cleared as fast as possible when you have extra money to hand, it needs to be affordable and right for your financial circumstances. You may want to talk to a mortgage adviser to run through your options.
Get in touch with your lender before starting to make overpayments. That way you can explain that you’re looking to overpay to reduce your term, not your monthly payments, if that’s your goal. You can also sort out how often you are looking to overpay, and how you’ll pay.
Make sure you won’t exceed any overpayment limit set by your lender. Otherwise, you might cancel out any savings you make with a potential early repayment charge.
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Caroline Ramsey is a content creator who specialises in personal finance. More than a decade of working in editorial teams, she offers highly tailored content covering a number of topics. Read more
Holly champions clear, jargon-free writing. She’s been creating finance content for leading organisations for over 10 years. Read more