Paying off your mortgage is a massive financial achievement and doing so early can save you thousands of pounds if done right.
Of course, it may not be financially possible to pay more than your mortgage repayments each month, but if you can afford to overpay by even a little regularly, you should be able to substantially reduce the length of your mortgage term and the amount of interest you end up paying overall.
However, most lenders also have rules and restrictions around how much you can repay, so even if you can afford to overpay, you need to be smart about how you do it.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
Overpayment basics
Most mortgage lenders allow you to overpay your mortgage, but there is usually an upper limit on how much extra you can pay in a year. The majority of mortgages enable you to make overpayments amounting to up to 10% of your outstanding mortgage balance each year.
Exceeding this limit usually means you will be charged an early repayment charge (ERC). These are typically calculated as a percentage of the amount still outstanding on your mortgage, and generally fall between 1 and 5%, though it can sometimes be a fixed amount per month or year instead. Sometimes, on a fixed rate deal, the percentage ERC charged decreases year-on-year. However, any penalty is likely to be fairly substantial, particularly on a relatively new deal, so you want to avoid paying one.
You should check your lender’s particular overpayment limits and penalties. If you are on your lender’s standard variable rate (SVR), you may be able to overpay as much as you want. Overpayment limits and penalties sometimes only apply when you are on a fixed rate deal, so you might be able to overpay more once the deal ends. If you are on a tracker deal, there may or may not be an overpayment limit, but it depends on the lender.
What are the advantages of overpaying your mortgage?
The major advantage of overpaying your mortgage is that you will be able to reduce the amount you pay back so you can clear your mortgage early.
Mortgage lenders tend to calculate interest on a daily basis, meaning that any reduction of your mortgage balance will immediately result in paying less interest. So if you make an overpayment, you reduce your mortgage term and lower the amount of interest you can be charged. This can amount to thousands of pounds worth of savings over the course of a typical 25-year mortgage term.
Your lender may provide an overpayment calculator on their site to help you calculate the savings you could make. Always do the maths first to see if making overpayments would be worthwhile, and speak to a mortgage advisor to help figure out what your best repayment options are.
How do I overpay my mortgage?
You can overpay your mortgage in a number of ways. However, you should make sure to talk to your lender first and let them know you’re planning to make overpayments, whether it is a one-off payment or increasing your regular repayments.
If you are increasing your monthly repayments, you may be able to increase the direct debit that you already have set up to your lender, or you may have to set up a separate standing order.
If you are making a one-off, lump sum payment then you can usually pay with a cheque, or do an ordinary bank transfer. Check with your lender for details on the simplest and best way to make overpayments.
Is it better to make lump sum or monthly mortgage overpayments?
If you have a large lump sum from, for example, an inheritance or work bonus, you might be tempted to overpay a large lump sum on your mortgage. However, in most cases, you will benefit far more from making smaller, long-term overpayments.
For instance, let’s say you were paying off a £200,000 repayment mortgage over a 25 year term and your mortgage rate is 5%.
A £10,000 lump sum overpayment paid in the first year of the term would knock over two years off the term and save you over £22,000 in interest.
However, overpaying by £100 a month from the beginning of the term would knock over three years off the mortgage term, and save you over £24,000 in interest payments.
An extra £200 a month, meanwhile, would knock over six years off the mortgage term, and save you over £41,000 in interest payments.
Should I overpay my mortgage?
Whether or not you should overpay your mortgage will depend on your individual circumstances and financial situation. Remember however, that you can’t get any overpayments you make back once you’ve made them, so you should only commit to paying in extra if you have enough savings to cover any unexpected expenses.
If you are lucky enough to have spare cash available as a lump sum or from your income, using this to make overpayments might not necessarily be the best solution. You could be better off investing or saving the money, for example, if you don’t have a savings buffer already in place. To find out more about whether you should save or overpay, check out our article Should I overpay my mortgage?
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
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