Overpaying Your Mortgage

When It Makes Sense and What to Check First

Overpaying your mortgage is one of those things that sounds straightforwardly sensible on the surface, and in many cases it genuinely is, but it's also one of those decisions that deserves a bit more thought than it sometimes gets, because whether it's the right move for you depends on your specific mortgage terms, your wider financial position and what else you could do with that money instead. Here's what's worth knowing before you start sending extra payments to your lender.

What Overpaying Actually Does

When you make overpayments on your mortgage, you're reducing the outstanding balance faster than the original repayment schedule requires. Because mortgage interest is calculated on the outstanding balance, reducing that balance more quickly means you pay less interest overall and clear the mortgage sooner. On a long-term mortgage with a significant outstanding balance, the cumulative interest saving from consistent overpayments can be substantial, and the reduction in term can be meaningful too.

The impact is most significant in the earlier years of a repayment mortgage, when more of your monthly payment is going towards interest rather than capital, because that's when reducing the balance has the greatest effect on your total interest bill.

The Early Repayment Charge Question

Before you make any overpayment, the most important thing to check is whether your mortgage has an early repayment charge that applies to overpayments, and if so, how much you can overpay before it kicks in. Most fixed rate mortgages allow overpayments of up to 10% of the outstanding balance per year without penalty, but the specific allowance varies between lenders and products, and exceeding it can result in a charge that wipes out the benefit of the overpayment entirely.

If you're on a tracker or variable rate mortgage, you're typically able to overpay without restriction, but it's always worth confirming this with your lender before you assume.

Is Overpaying Always the Best Use of the Money?

This is the question that doesn't always get asked, and it's worth considering properly. If you have high-interest unsecured debt, such as credit cards or personal loans, paying that down first will almost always save you more money than overpaying a mortgage, because the interest rates on unsecured debt are typically much higher than mortgage rates. Clearing expensive debt first and then directing that freed-up money towards mortgage overpayments is a more effective approach for most people in that situation.

It's also worth thinking about your savings and emergency fund position. Having accessible savings for unexpected costs means you're less likely to need to borrow money at short notice, which keeps you in control of your finances. Overpaying your mortgage reduces your monthly obligation over time, but that equity isn't easily accessible if you need cash in a hurry, so having a reasonable savings buffer in place before you start overpaying is generally sensible.

How to Overpay

If you've decided that overpaying makes sense for your situation, it's worth checking with your lender how they prefer to receive overpayments, because the mechanism matters. Ideally, overpayments should be applied to reduce the outstanding capital balance rather than being held as a credit against future payments, because reducing the balance is what generates the interest saving. Most lenders will apply overpayments to the capital by default, but it's worth confirming.

You can typically overpay as a one-off lump sum or by increasing your monthly direct debit, and some lenders allow you to do both. Regular monthly overpayments are often the most straightforward approach because they build the habit into your budget, but occasional lump sum payments, from a bonus or an inheritance for example, can also make a significant dent in the balance.

When Your Fixed Rate Ends

One particularly good moment to think about overpaying is when you're approaching the end of a fixed rate period, because it's a natural point to review your mortgage arrangements and consider whether you want to reduce the balance before moving onto a new deal. A lower outstanding balance means you may be able to access better rates at your next remortgage by moving into a lower loan-to-value bracket.

If you'd like to talk through whether overpaying makes sense for your situation and how to go about it in a way that fits your mortgage terms, I'm happy to help. Give me a call or send me a message and we'll look at the numbers together.

Barry, The Mortgage Network - Helping you make confident decisions and plan a mortgage that works for you.

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