Guide
Should I overpay my mortgage?
Overpaying can save a surprising amount of interest and clear your mortgage years early, because the extra comes straight off the balance. The two things to weigh up are your lender's penalty-free limit, and whether the money would do more elsewhere.
Why overpaying saves so much
When you overpay, the extra goes onto the balance, not the interest. Because interest is then charged on a smaller balance every month for the rest of the term, you save interest the whole way through, and the mortgage clears sooner. By default your monthly payment stays the same and the term shortens, which saves the most interest.
The effect compounds. A modest regular overpayment (say £150 a month on a £200,000 mortgage) can take several years off the term and save tens of thousands in interest over 20 to 25 years. The earlier in the mortgage you do it, the bigger the effect, because that's when the balance (and so the interest) is highest.
The 10% rule to watch
Most lenders let you overpay up to 10% of the outstanding balance each year without penalty. If you're on a fixed-rate deal and go over that limit, an early-repayment charge (ERC) can apply, which can wipe out the saving. Once your fixed period ends, the cap usually lifts. Always check your own mortgage's terms before making a large overpayment.
Overpay, save, or invest?
Overpaying gives you a guaranteed return equal to your mortgage rate: pay down a 5% mortgage and you've effectively "earned" 5%, risk-free and tax-free. Investing might beat that over the long run, but it isn't guaranteed. A sensible order for most people is:
- Keep an emergency fund first, since overpayments are hard to get back.
- Clear higher-interest debt (credit cards, loans) before the mortgage.
- Make sure you're getting any employer pension match.
- Then weigh overpaying against investing, based on your rate and your appetite for risk.
Reduce the term or the payment?
You can usually choose. Shortening the term (keeping the payment the same) saves the most interest. Lowering the payment (keeping the term the same) gives you breathing room each month instead. Most people chasing the biggest saving shorten the term.
This is general information to help you plan, not financial advice. Your lender's exact terms and how they apply overpayments can vary.
See what overpaying saves you
Our free overpayment calculator shows the interest saved, the years cut off your term and your new payoff date, from a monthly amount, a one-off lump sum, or a yearly figure. Private to your device.