Mortgage overpayments

Overpaying on your mortgage could save you thousands of pounds in interest and could help you pay your mortgage off early too.

But it’s not for everyone, so find out if overpaying could benefit you.

What’s a mortgage overpayment?

Mortgages take a long time to pay back - often 25 years or more.

And because you’re charged interest on your home loan, you end up paying back a lot more than you borrowed.

The amount you ultimately pay back will depend on the sum of money you borrowed in the first place, the type of mortgage you have, the mortgage interest rate and how long your mortgage runs.

The quicker you pay off your mortgage, the less interest you’ll pay. This is where overpaying on your mortgage can help.

Mortgage overpayments are additional payments you make on top of your usual monthly mortgage payments.

Paying more than you are required to can reduce the amount of interest you pay overall and help you become mortgage-free earlier.

Types of overpayment

There are two ways in which you can overpay on your mortgage.

• Regular monthly overpayments throughout the year, on top of your normal monthly payment
• A lump sum overpayment

• Check your lender’s policy before overpaying. Many lenders have limits on how much you can overpay before they start charging steep fees.

  How does a mortgage overpayment work?

  By repaying more of your mortgage, the outstanding amount reduces faster and gains less interest.

  You should discuss with your lender how you want your overpayment money to be used to get the most benefits.

  In most cases, using overpayments to reduce the term of your mortgage, rather than to lower your monthly payments, will save you the most money.

  An online mortgage overpayment calculator can show you how overpaying could reduce the amount of interest you’ll pay over the term of your loan, as well as how much earlier you could pay off your mortgage.

  Certain types of mortgage - such as offset and current account mortgages - give you the flexibility to borrow back the money you’ve overpaid.

  Overpaying can also help you build up enough credit to allow you to take a ‘payment holiday’ or to make underpayments on your mortgage later on. This can be useful if you foresee your financial circumstances changing some time down the line. For example, if you intend to start a family in the future and you or your spouse plan to take time off work and money will be tighter.

  How much can I overpay?

  You’ll need to check with your lender that you can overpay on your loan, what your particular mortgage’s overpayment allowance is, and whether any fees will be applied for overpaying.

  Fixed-rate mortgages typically allow you to overpay by 10% of the outstanding balance of your mortgage per annum.

  Other mortgages - such as tracker or variable rate mortgages often allow unlimited mortgage overpayments.

  If you pay over the limit of your mortgage’s annual overpayment allowance, you might have to pay an Early Repayment Charge (ERC).

  Talk to your lender to make sure you don’t slip up and overpay more than you’re allowed to.

  If you do make a mistake and you’re charged an ERC, this will normally be added to your mortgage where you’ll be charged interest on it. So you might want to avoid interest charges by paying the ERC upfront to your lender.

  How can I make an overpayment on my mortgage?

  If overpaying on your mortgage seems the right step for you, contact your mortgage lender.

  Let them know that you want your overpayment(s) to be used to shorten the length of your mortgage.

  Your lender will let you know how to make a single overpayment or how to amend your Direct Debit for regular overpayments.

  Should I make overpayments on my mortgage?

  If you have spare cash – and the rate of interest you’re paying on your mortgage is higher than what you could earn in a savings account – it’s worth looking into overpaying on your mortgage.

  Before you decide to make overpayments on your mortgage, though, it’s a good idea to check:

  • That other debts you may have - such as an overdraft, outstanding credit card or store card balances - aren’t costing you more. It may be better to pay off those first
  • You have enough money set aside for ‘rainy day’ emergencies - ideally to cover six months’ essential expenses (such as your mortgage, utility bills and any direct debits and regular standing orders you have)

  If your particular mortgage lender charges high fees for overpayments, another option could be to look at shortening your mortgage instead. You may get charged a small one-off fee for changing to a shorter term mortgage, but it means you can make the higher monthly payments you want to without penalty. Essentially, you’ll be permanently ‘overpaying’.

  However, if you hit financial trouble and you’re locked in to these higher payments, you won’t have the flexibility that overpaying gives you. Making voluntary overpayments means you can stop them if you experience unexpected money troubles.