Should I overpay on my mortgage?
Overpaying on your mortgage can have big benefits, read our guide to find out more
When you take out a mortgage your lender will work out how much you need to pay back every month to meet the terms of your loan deal – but that doesn’t mean you can’t pay more. If you have the cash available, overpaying on your mortgage - either regularly or as a one off - can save you money on your mortgage over the long term. It will mean there’s less interest to pay overall, since you’ll clear your debt quicker.
But overpaying on your mortgage might not be right for everyone. 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, for example.
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. So a mortgage overpayment could be:
A one-off lump sum overpayment – if you have some extra cash to hand you might consider putting it towards paying off your mortgage
Regular overpayments – say for example, your monthly mortgage repayments are £700, but you pay £800 per month instead - you’re overpaying by £100 every month
A combination of the two
It’s easy to see how much you could save with our simple overpayment calculator – and you can compare the benefits of making a one-off lump sum, a monthly overpayment, or a combination of both.
Can I make mortgage overpayments?
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.
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. You could be charged a penalty fee if you overpay by more than the allowed limit.
Rules about overpayments vary between mortgage products as well as different lenders. Your lender might allow unlimited overpayments on a lifetime tracker mortgage, or a flexible offset mortgage for example, 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. However, SVRs are expensive – so if that’s the rate you’re paying, you might be better off remortgaging to a more competitive deal.
How to overpay my mortgage
If you decide mortgage overpayments are right for you, simply tell your lender you want to make overpayments to reduce your mortgage term.
With some lenders you’ll be able to change your mortgage payment online and arrange for the higher amount to be taken by direct debit each month. Or another option is to set up a separate standing order to your mortgage account to make the overpayment.
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.
Should I overpay or reduce term?
There are two ways to overpay your mortgage – you can either have your overpayments deducted by your lender and put towards paying off your mortgage balance, or you can request to reduce the term of your mortgage. For many people the savings are higher with a reduced mortgage term.
Reducing your term means your monthly repayments will increase – but because you’ll be paying your mortgage off over a shorter time-frame you’ll pay less interest overall. Reducing your term could save you tens of thousands of pounds over the life of your mortgage.
Should I make my overpayments monthly or as a lump sum?
If you decide to overpay on your mortgage, it’s up to you how you do it – you could make smaller overpayments each month or overpay with a lump sum whenever you have the cash to hand. Either choice should lead to mortgage savings - but they both have their pros and cons.
The main advantage of regular monthly overpayments is that it’s more predictable – you can simply 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 a lump sum off your mortgage will save you money on interest and help you clear your mortgage faster than if you spread your overpayments over a number of years. But this option holds risk. If you needed 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. The only way to get the money back might be to remortgage and release equity from your property.
How much can I overpay on my mortgage?
Many providers have a limit on how much you can overpay on your mortgage. Usually, this is 10% of your outstanding mortgage balance per year. If you go over this amount you could be hit with a large fee, which might cancel out the savings you’ve made by overpaying your mortgage.
Lenders charge these fees to cover their own losses. This is because when they agree to a mortgage they’re expecting to make a certain amount of money in interest from that loan deal over the term. If you overpay that eats into their bottom line and their profits.
But policies will vary between different lenders so it’s a good idea to check what the rules are for your specific mortgage.
A great way to work out how much to overpay on your mortgage is to use our overpayment calculator. Simply fill in the amount you intend to overpay and we’ll show you how much earlier you could pay off your mortgage, and how much money you’ll save in interest over the term.
How do mortgage overpayments affect my loan to value ratio?
Overpaying on your mortgage will have other positive effects – increasing the equity you own in your property. This means you’ll have a lower loan to value ratio (LTV) – that’s the portion of your home that’s covered by the mortgage, rather than 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 on your mortgage now could save you even more on interest down the line.
What are the advantages and disadvantages of making overpayments?
There are pros and cons to overpaying on your mortgage. It’s important to weigh these up before making a decision. Depending on your financial circumstances, the drawbacks of making overpayments might outweigh the benefits.
Some of the advantages of overpaying your mortgage include:
Reducing your interest. Making overpayments means you’ll pay off your mortgage sooner – so there’s less interest overall. Over the course of a mortgage, this could save you tens of thousands of pounds
Increasing your equity. When you overpay you own a bigger portion of your home, and it brings you closer to owning it outright. Every overpayment you make brings you a little closer to being free of all mortgage debt
Better than a savings account. For most people, it makes more sense to overpay on your mortgage than to keep your money in a savings account. That’s because you’ll earn more in interest savings on your mortgage than you could earn in a typical savings account
But you should keep the disadvantages in mind too. Some of these include:
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, such as job loss – if you use up all your spare funds in overpaying the mortgage you could leave yourself financially exposed
Other debts. 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. Many lenders will charge you a fee if you overpay by too much – making a big overpayment could end up costing you money if you go over the permitted limits
In general, you should make overpayments only if you’re sure you can afford them. It’s a good idea to make overpayments if you already have an emergency fund, and you don’t have any other, more pressing debts that need to be repaid.
Bear in mind if you don’t have a lot in cash savings, overpaying could be risky.
Can I get my mortgage overpayments back in an emergency?
Think carefully about how much you can afford to overpay and whether you should use savings or large cash lump sums to pay off your mortgage. Do you have enough cash in savings to act as a safety net should you need to access cash in an emergency – such as needing a new car or if you lost your job?
This is because 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. You may not be able to do this at a competitive mortgage rate – if interest rates have risen, for example. 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 but overpaying on an interest-only home loan doesn't give you all the same benefits.
When you overpay on a repayment mortgage all of 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 can 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 increase the equity you hold in your property, and it won’t reduce the capital balance of your outstanding mortgage.
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Your home may be repossessed if you do not keep up repayments on your mortgage