Making overpayments on your mortgage can reduce the interest you pay over its lifetime and help you become mortgage-free sooner. For many homeowners it’s a sensible use of spare cash, but it isn’t the right choice in every situation. Here’s what to consider.
How overpaying saves you money
Interest is charged on the amount you still owe. When you overpay, you reduce that balance faster, so less interest builds up in future. Even modest regular overpayments can make a noticeable difference over a long mortgage term, because the savings compound year after year.
Overpaying can also reduce your loan-to-value, which may help you access better rates when you come to remortgage.
Check your overpayment allowance
Most fixed and discounted-rate mortgages allow you to overpay up to a set limit, often 10% of the outstanding balance each year, without penalty. Go over that limit and you may have to pay an early repayment charge on the excess. Tracker and standard variable rate mortgages often have no limit at all. Always check your mortgage terms, or ask your lender, before you overpay.
Lower payments or shorter term?
When you overpay, lenders usually either reduce your monthly payment or keep it the same and shorten your mortgage term. Keeping payments the same and shortening the term typically saves more interest overall. Some lenders let you choose; others apply one approach automatically, so it’s worth asking.
When overpaying might not be the best move
- You don’t have an emergency fund. Money you overpay is usually hard to get back. It’s sensible to keep accessible savings for unexpected costs first.
- You have more expensive debt. Credit cards or personal loans usually charge more interest than a mortgage, so clearing those first normally saves more.
- Your savings could earn more. If you can earn more interest after tax on savings than your mortgage rate costs you, saving may make more sense, especially if you’d like the flexibility.
- You’re not making the most of pension contributions. Especially where an employer matches contributions, paying into a pension can sometimes be more valuable, though that money is locked away until later life.
A middle ground: offset mortgages
An offset mortgage links your savings to your mortgage, so you only pay interest on the difference. You keep access to your savings while getting a similar effect to overpaying. Rates on offset mortgages can be higher, so it’s worth comparing the numbers.
The right answer depends on your rates, your wider finances and your goals, so this is general information rather than advice for your circumstances.
Your home may be repossessed if you do not keep up repayments on your mortgage.
If you’re thinking about overpaying, remortgaging or switching to an offset mortgage, we can help you compare the options. Get in touch for a free consultation.
