If you have spare cash each month, overpaying your mortgage can be a genuinely powerful way to save money, but it isn't always the right move. Here are the key things to weigh up.
The benefits of overpaying
- Save interest. Every extra pound you put towards the capital reduces the balance interest is calculated on, so you save more in interest the earlier in the term you overpay.
- Clear your mortgage faster. Regular overpayments can knock years off your term, meaning you own your home outright sooner.
- Build equity quicker. A lower balance means a lower loan-to-value ratio, which can give you access to better rates at your next remortgage.
The things to watch out for
- Early repayment charges. Most fixed and discount deals allow you to overpay up to 10% of the balance per year without penalty. Go over that limit and you'll usually pay an early repayment charge, so check your offer before making large lump sum overpayments.
- Emergency savings. Money paid to the mortgage isn't easy to get back. Make sure you have an accessible emergency fund (typically 3 to 6 months of expenses) before locking surplus cash into the mortgage.
- Higher-rate debt. If you have credit card or personal loan debt at a higher interest rate, paying that off first will almost always save you more money than overpaying the mortgage.
- Savings rate vs mortgage rate. If you can get a better interest rate on savings or investments (after tax) than your mortgage rate, it can make sense to save or invest the money instead. When mortgage rates are higher than savings rates, overpaying usually wins.
How to overpay
You can typically either increase your regular monthly payment or make ad-hoc lump sums. When you overpay, ask your lender to apply the overpayment to reduce the term, that gives you the maximum interest saving. If you'd rather keep flexibility, you can usually choose to reduce the monthly payment instead, while keeping the term the same.
Our mortgage overpayments calculator can help you see the impact on your specific mortgage. If you'd like to talk through whether overpaying is the right call for you, get in touch.
Your home may be repossessed if you do not keep up repayments on your mortgage.