Should I overpay on my mortgage?

Key takeaways

• Making overpayments allows you to pay extra towards your mortgage each month, potentially shortening the length of your mortgage term and saving you money on interest

• Overpayments can be used to lower your monthly mortgage repayments, easing your financial burden

• Your mortgage provider may set a limit on how much you can overpay

If you have the cash available, overpaying on your mortgage – either regularly or as a one-off – can save you money on your mortgage in the long run.

But overpaying mortgage instalments might not be right for everyone. For example, using savings or money from your disposable income to overpay on your mortgage could leave you with less cash to fall back on in an emergency.

What’s more, not all lenders have the same rules for overpaying. Some banks might even hit you with a penalty fee if you overpay too much.

What is a mortgage overpayment?

Making a mortgage overpayment simply means paying more towards your mortgage than you have to under the terms of your home-loan agreement. Your lender will set a minimum amount you must pay back per month, but you’re usually free to go over that level at any time.

What are the benefits of overpaying your mortgage?

There are pros and cons to overpaying on your mortgage. It’s important to weigh these up before making a decision.

• Reducing your interest: Making overpayments means you’ll pay off your mortgage sooner, so there’s less interest overall

• Increasing your equity: When you overpay, you own a bigger portion of your home and it brings you closer to owning it outright.

• Better than a savings account: For most people, it makes more sense to overpay on your mortgage than to keep your money in a bank account. That’s because you’ll earn more in interest savings on your mortgage than you could earn in a typical savings account or even an ISA

The downsides

• Less cash to hand: It’s a good idea to have an emergency fund in case you’re hit with some unexpected expenses or your financial situation changes (for example, in the event of a job loss).

• Other debts to pay: Interest rates for mortgages are usually much lower than other kinds of household debt. So, if you have credit card debt, for instance, you should pay that off first

• Fees and charges: While most lenders will let you overpay 10% of your mortgage balance each year, you'll be charged a fee if you overpay too much, known as an early repayment charge (ERC). In fact, making a big overpayment could end up costing you thousands of pounds if you go over the permitted limits

Should I overpay or reduce the mortgage term?

There are two ways to overpay your mortgage:

• By overpaying: your overpayments are deducted by your lender and put towards paying off your mortgage balance. You can overpay by an extra amount every month, though you can choose to vary this amount or stop altogether

• By reducing your mortgage term: you arrange a new deal which is spread over fewer years, meaning your monthly mortgage payments are higher and you pay off your mortgage sooner

For many people, the savings are higher with a reduced mortgage term, as you'll save a large amount of interest. But it’s worth noting that, compared with reducing your mortgage term, overpaying your mortgage can provide you with more flexibility and a lower degree of risk.

If you decide to reduce your mortgage term, you're committed to an agreement to pay higher monthly instalments. This means that, if your financial circumstances change, you may find it challenging to keep up with the repayments.

This is especially true if you’re on a variable-rate deal and interest rates are rising. Instead, by overpaying on your mortgage, you can vary how much you add on top of your set instalments based on your pocket and personal needs. Not only that, but you can stop overpaying altogether if you can no longer afford the expenses.

How much can I overpay?

Before you think about overpaying on your mortgage, you need to check if your mortgage provider has any restrictions on the overpayments you can make.

Rules about overpayments vary between mortgage products, as well as between different lenders.

Some mortgages allow you to overpay as much as you want, but others limit overpayments to a percentage of the amount you owe. On many mortgages, this maximum limit is 10% of the outstanding balance per year.

Bear in mind that you could be charged a penalty fee if you overpay by more than the allowed limit.

For example, your lender might allow unlimited overpayments on a lifetime tracker mortgage or a flexible offset mortgage, but limit overpayments to 10% of the balance on its fixed-rate deals. That’s why it’s important to check with your lender and read any small print before you overpay.

If you're paying your lender's standard variable rate (SVR), you can usually overpay by as much as you want. Keep in mind, though, that SVRs are expensive. So if that’s the rate you’re paying, you might be better off remortgaging to a more competitive deal.

See how much you could save by using the MoneySuperMarket mortgage overpayment calculator.

How to make an overpayment

With some lenders, you can change your mortgage payment online and arrange for the higher amount to be taken by direct debit from your current account each month. Another option is to set up a separate standing order to your mortgage account to make the overpayment.

If your mortgage rate is less than the best available savings rate (currently 6.00%^{^} ), it can make sense to put overpayments into your savings account and overpay a larger sum when the account reaches maturity.

This gives you greater flexibility in case of an emergency, and you can overpay a larger lump sum because you've earned 'more' interest than you'd save by overpaying a mortgage at a lower interest rate.

Alternatively, you could set up your mortgage account as a payee on your online banking. That way, you can make instant overpayments whenever you want.

Generally, overpaying via online banking or app is faster, more transparent and more reliable than traditional methods of overpaying on your home loan, such as standing orders, CHAPs and cheque.

What's more, with some mobile banking apps, you'll get warnings to prevent you making overpayments beyond your allowance and incurring charges.

Should I make regular overpayments monthly, or repay in a lump sum?

If you decide to overpay on your mortgage, it’s up to you how you do it and there are pros and cons to each option. You could make smaller overpayments each month or overpay with a lump sum whenever you have the cash to hand.

Smaller monthly repayments: A simple way to overpay because you can factor in the extra cost to your monthly budget.

If you decide you can’t afford your overpayments, you can reduce or stop them at any time and go back to your original monthly mortgage repayment.

Paying off a lump sum: You’ll usually save more money in interest payments and clear your loan faster

If you need the money back in an emergency, such as job loss, it could be difficult. Most mortgages won’t allow you to access the ‘overpaid’ money once it has gone towards paying off the mortgage.

How does overpaying mortgage affect my loan-to-value ratio?

Overpaying on your mortgage will also increase the equity you own in your property. This means you’ll have a lower loan-to-value ratio (LTV). This is the portion of your home that’s covered by the mortgage, rather than what is owned outright.

Since you’re putting extra money into your mortgage, your debt will shrink and your equity in your home will rise.

This not only brings greater financial stability, but it also means you’re likely to have more options and lower interest rates when you come to remortgage to a new loan deal.

Many lenders will offer you better rates if you have a lower LTV. So, overpaying your mortgage now could save you even more on interest down the line.

When is the best time to make overpayments?

Generally, there is no right or wrong answer, as this will depend on a number of factors and on your type of mortgage deal.

If your interest rate is reviewed and perhaps amended on a daily basis, then there isn’t really an ideal time to make overpayments. You can do so whenever you wish.

However, if it’s calculated monthly or even annually, then you may want to consider overpaying on your mortgage just before the interest is re-evaluated.

Can I get my mortgage overpayments back in an emergency?

It can be difficult to get the money back once you have used it to pay off a chunk of your mortgage debt. You can access the money again but, in some cases, you will need to remortgage to release the equity back.

However, you may not be able to do this at a competitive mortgage rate if, say, interest rates have risen. There may also be fees attached to restructuring your mortgage loan.

Should I overpay on an interest-only mortgage?

You can make overpayments on both a repayment (capital and interest) mortgage and interest-only mortgage. However, overpaying on an interest-only home loan doesn’t necessarily give you all the same benefits.

When you overpay on a repayment mortgage, all your overpayment goes towards reducing the capital loan of your mortgage. This is why overpaying can be so beneficial, because you can quickly start to reduce your mortgage balance.

In contrast, with an interest-only mortgage, your overpayment will typically only be used to reduce future interest payments or the overall interest you pay. So, while it could still be a good idea to save some money, overpaying won’t usually increase the equity you hold in your property.

Compare mortgages with MoneySuperMarket

It’s easy to find a great mortgage deal with MoneySuperMarket. We compare prices from more than 90 lenders across the market, so you can be confident you’re getting the right deal for you.

Shopping around can help you to save money on your mortgage repayments. Even if you already have a mortgage, there could be a better deal out there. Search now to see how much you could save.

Use our mortgage repayment calculator to see what your repayments will be based on how much you’re borrowing, the interest rate and fees of the deal, and how long you will have to pay it off for. You can also find out much you could borrow using our mortgage affordability calculator.

Your home may be repossessed if you do not keep up repayments on your mortgage.