Should I overpay my mortgage?

Is it a good idea to overpay your mortgage?

Yes, overpaying your mortgage can be a good idea. It could save you thousands of pounds in interest and help you become debt-free sooner. This is because the amount of interest you pay is worked out as a percentage of your outstanding mortgage loan - by reducing your mortgage debt through overpaying, you’ll reduce the amount of interest you pay overall. However in some cases, you may be better off saving or investing your spare cash instead.  

Learn more: Steps to getting your first mortgage

How much can I overpay on my mortgage?

The amount you can overpay on your mortgage will depend on your mortgage agreement. Typically, you can overpay 10% of your total outstanding mortgage balance penalty-free if you have a fixed-rate mortgage deal, although some lenders will let you overpay up to 20%. If you are on your lender’s standard variable rate (SVR), there is usually no limit to the amount you can overpay without charges. If you’re on a tracker rate mortgage deal, you can usually overpay but be mindful that if you’re in your introductory period you might have to pay an early repayment charge. To be on the safe side, regardless of the type of mortgage you have, check with your lender before making any overpayments. 

Learn more: How long does a mortgage in principle last?

Is it better to overpay a mortgage monthly or in a lump-sum?

If you can afford to overpay a large lump sum in the near future, this can save you more in interest than if you were to split the same amount into monthly payments. However, if making a lump sum now could cause you financial stress later, you may be better suited to monthly overpayments. You’ll feel the benefit of paying some of your mortgage off early, while still having cash in the bank for short-term expenses and emergencies. You’ll also be able to pause your overpayments at any time, which can give you peace of mind if your circumstances change.

Example - overpaying through regular payments

Sarah has received a small pay rise and wants to put some of her extra earnings towards her mortgage. Her mortgage is £200,000 with 25 years left to pay and she currently has a 4.5% interest rate, so her monthly repayments are £1,112 a month. 

If she overpays her mortgage by £100 a month, she’ll save £21,120 in interest and pay her debt off 3 years and 6 months sooner. And if she overpays by £500 a month, she’ll save £63,820 in interest and become mortgage-free after 13 years, instead of 25.

Example - overpaying in a lump sum

Alex and Tom have received an inheritance from Alex’s grandmother. They want to put £20,000 of it towards their mortgage. Like Sarah, they have £200,000 left on their mortgage, with 25 years remaining and a 4.5% interest rate. 

If they make a £20,000 lump sum overpayment, they’ll save £35,730 in interest and pay their debt off 4 years and 2 months sooner.

Learn more: What to look for when viewing a house

Is it better to pay off a mortgage or save money?

Whether it’s better to pay off a mortgage or save money depends on your individual circumstances. If your mortgage rate is higher than the amount of interest you can earn on savings, it usually makes sense to overpay on your mortgage. If you can earn more interest on your savings than you pay on your mortgage, you’ll be better off keeping the cash. 

Learn more: How much should I have in savings?

Let’s take a look at how your mortgage rate and savings rate can have an impact on the right choice for you. In the tables below we’ve assumed that you’ve borrowed £200,000 at 4.5% over a 25-year term.

Now let’s compare this to saving for the same period of time with three different savings rates:

As you can see, in these examples saving for the same amount of time only puts you in a better financial position if you have a saving rate that is higher than the rate of interest on your mortgage. 

Remember, these are illustrative examples and as such make certain assumptions, such as your mortgage interest rate staying the same over the entire mortgage term. It’s important to get expert advice before deciding whether overpaying on your mortgage is right for you or not.

Learn more: What to do in the 6 months before buying a house

Will my mortgage payment go down if I pay extra?

Yes, your mortgage payments can go down if you pay extra, as you’ll potentially shave off a fair amount of interest. Interest is worked out as a percentage of your outstanding loan - with a smaller loan left, you’ll pay less.

Is it cheaper to overpay my mortgage or reduce the term?

Whether it’s cheaper to overpay on your mortgage or reduce your mortgage term depends as there’s not a right or wrong answer. The cheaper option for you will depend on your interest rate, how much you can afford to overpay, and whether there are any early repayment charges or mortgage fees. If your lender will let you overpay by a set amount each year, this can be a flexible way to save money on interest and become debt-free sooner. If your situation changes at any point, you can cancel your overpayments and go back to making your regular mortgage payments. 

Switching to a new mortgage deal with a shorter term could give you access to a better interest rate and save you more money overall. But you’ll need to consider the cost of any early repayment fees/remortgage fees before making the commitment. You’ll also need to make sure that you can afford the new repayments. If your circumstances change in future and you need to remortgage again, you may be placed on a higher interest rate than before and have fees to pay. 

Learn more: Buying a house timeline

How to pay extra on your mortgage

Paying extra on your mortgage can be as simple as calling your lender and altering your monthly payments. If you’re overpaying a lump sum, this can usually be done over the phone too. It may be possible to change your mortgage payments via your lender’s website or app, but we’d recommend speaking to your lender before making any overpayments. That way you can check whether there’ll be any fees to pay and discuss how your money will be used. For example, do you want to lower your mortgage payments or shorten the term?