Overpayments
Overpaying your mortgage: how much it saves, and when it is worth it
Paying a little extra off your mortgage is one of the few guaranteed returns available: every pound you overpay stops costing you interest at your mortgage rate. The effect builds up over years, so small amounts make a bigger difference than most people expect. But it is not always the best use of spare money. Here is how to tell.
What a little extra each month does
Take a £200,000 repayment mortgage at 5.2% over 25 years, with a normal payment of £1,193 a month. Overpaying a fixed amount each month, if the rate stayed the same:
| Extra each month | Interest saved | Mortgage-free sooner by |
|---|---|---|
| £100 | £25,921 | 3 years 7 months |
| £200 | £44,169 | 6 years 2 months |
| £500 | £76,916 | 11 years 2 months |
Without overpaying, this mortgage costs £157,781 in interest. An extra £200 a month cuts that by more than a quarter. The earlier you start, the more it saves, because each overpayment avoids interest for every remaining year of the loan.
Lump sums: pay off sooner, or lower payments?
If you put in a lump sum, for example from a bonus or inheritance, your lender will either keep your payment the same so you finish sooner, or recalculate a lower payment over the same term. Many let you choose. On the example, a £10,000 lump sum now:
- Pay off sooner: saves £24,428 of interest and finishes 2 years 4 months early. Your payment stays at £1,193.
- Lower payments: your payment drops by about £60 to £1,133 a month, and you save £7,889 of interest.
Paying off sooner saves far more, because the money keeps working for longer. Lower payments are useful if your budget is tight or you want breathing space, and you can always overpay later.
Watch the 10% allowance
Most fixed and tracker deals let you overpay up to 10% of the balance each year without a charge. Go over that and you may pay an early repayment charge, often 1% to 5% of the amount over the limit. On a £200,000 mortgage that is £20,000 a year, which is plenty for most people, but a big lump sum can exceed it. Check your own deal, split a large overpayment across two years, or wait until your deal ends, when overpayments are usually unlimited.
Overpaying also lowers your loan to value faster, which can put you in a cheaper rate band when you remortgage.
If the same home is worth £260,000, the £200,000 loan starts at about 77% loan to value. Overpaying £200 a month gets it under 75% a year sooner, and under 60% three years sooner, often unlocking lower rates at the next remortgage.
Overpay or save?
Overpaying earns your mortgage rate, tax-free and guaranteed. Saving earns the savings rate, which may be taxed. Over ten years, £200 a month on the example mortgage builds about £31,400 of extra equity. The same £200 a month in savings would grow to about £30,200 at 4.5% tax-free, for example in an ISA, or about £27,500 at 4.5% taxed at 40%.
So at a 5.2% mortgage rate, overpaying comes out ahead. If your mortgage rate is lower than what your savings earn after tax, for example a cheap fix taken out a few years ago, saving can win, and you can always use the savings to pay down the mortgage when the deal ends.
Before overpaying, most people should:
- Keep an emergency fund of a few months' spending. Money paid into a mortgage is hard to get back.
- Clear more expensive debts first, such as credit cards and personal loans.
- Check whether a workplace pension with employer matching, or tax relief, would beat it.
See what you could save
The overpayment calculator works this out for your mortgage, with monthly, one-off and yearly overpayments, either option for lump sums, a warning if you go over your allowance, and a chart of your balance with and without overpaying. Add your home's value and it shows when you would reach each loan to value band.