Is it worth overpaying your mortgage?
Overpaying can save thousands in interest and cut years off your mortgage. It is not always the best use of spare cash, though. Here is how to decide.
The short answer
Overpaying is usually worth it if you have an emergency fund, no more expensive debts, and your lender lets you overpay without a charge. Every pound you overpay saves interest at your mortgage rate, with no tax to pay on that saving.
To see your own figures, use the mortgage overpayment calculator.
What overpaying saves: an example
Take a £200,000 repayment mortgage at 4.5% over 25 years. The monthly payment is about £1,112, and over the full term you pay roughly £133,500 in interest.
- £200 extra a month: saves about £36,300 in interest and clears the mortgage around 6 years earlier (about 18 years 11 months in total).
- One £10,000 lump sum now: saves about £19,300 in interest and finishes about 2 years and 2 months early.
These are estimates with the rate fixed for the whole term. Real mortgages change rate, so your figures will differ.
Why the early years matter most
Interest is charged on what you still owe. Early on the balance is highest, so overpaying then removes the most future interest. The same overpayment late in the term saves much less. A lump sum now beats the same amount spread over several years.
Check your overpayment limit
Many lenders let you overpay up to 10% of the balance each year without charge. Above that you may pay an early repayment charge, often a percentage of the amount over the limit, which can wipe out the benefit. This matters most during a fixed or discounted rate. Your mortgage offer or your lender will tell you the exact limit, and whether an overpayment shortens your term or lowers your monthly payment. Ask for the term to be shortened if you want the bigger saving.
When something else may come first
- Expensive debts. Credit cards, overdrafts and loans usually charge far more than a mortgage, so paying those off saves more. If debt is a worry, see our free debt advice guide.
- No emergency fund. Money you overpay is hard to get back. Keep a few months of essential costs in savings first.
- Higher savings rates. If you can earn more after tax than your mortgage rate, saving can beat overpaying, but savings rates change. Use our savings calculator to compare.
- Pension contributions. If your employer matches contributions, that is often better value than overpaying.
- Your plans. If you may need the money soon, keep it accessible.
How to start
- Check your mortgage terms for the overpayment allowance and any charges.
- Work out what you can afford each month using the budget helper.
- Try the figures in the overpayment calculator.
- Ask your lender how to set up regular overpayments, and make sure they shorten the term.
Where to learn more
This guide is for information only and is not financial advice. For advice on your own mortgage, speak to your lender or a regulated mortgage adviser.