Should I overpay my mortgage?

Want to pay your mortgage off faster? Mortgage overpayments could be for you.

Mortgage overpayments are when you pay more than your normal monthly mortgage payment. This means you can pay your mortgage off faster, and you end up paying less interest overall.

We'll weigh up the pros and cons on overpaying your mortgage to help you decide if it's the right option for you.

Is it worth overpaying my mortgage?

Whether overpaying your mortgage is worth it depends on your financial situation and what you’re trying to achieve.

If your goal is to become mortgage-free sooner, making overpayments is one of the most flexible ways to reduce your loan balance and shorten your term. Many lenders allow you to pay extra each month or as a lump sum, but most will set a limit on how much you can overpay each year without facing early repayment charges. Always check your lender’s rules before making a payment.

It can also make sense to overpay if your mortgage interest rate is higher than the rate you’re earning on savings.

For example:

• £5,000 in a savings account at 1% interest would earn you £50 in a year.
• The same £5,000 on a mortgage at 3% interest would cost you £150 in a year.

In this case, overpaying your mortgage could save you more money than keeping the cash in savings.

On the other hand, if you can find a savings account with a higher interest rate than your mortgage, it may be better to save instead. Keep in mind that once you make an overpayment, you usually can’t access that money again, whereas savings are often easier to withdraw if needed.

How to overpay my mortgage

If you've considered all your options and decide a mortgage overpayment is right for you, there are a few ways you can do this:

• Change your mortgage payments online with your mortgage lender to arrange more money to be taken out of your direct debit.
• Set up a separate standing order of the mortgage overpayment to your mortgage account.
• Transfer the money as and when on your online banking app.

But before you overpay on your mortgage, make sure you've talked to your lender first.

How much can I overpay my mortgage?

Typically, most lenders have a fee-free overpayment limit of 10% of what's left on your loan per year. But the amount varies, so check the policy with your lender.

Going above the lender's limit means you could be charged additional fees. Your early repayment charge (ERC) is usually 1-5% of the outstanding mortgage. But for some mortgages your ERC percentage goes down the longer you've been on your mortgage deal.

So be aware that if you choose to overpay more than the fee-free limit you lender's set, you could part with much more cash than you expected.

Is it better to overpay my mortgage monthly or with a lump sum?

Ultimately it's down to your personal preferences.

If you make smaller, monthly overpayments, it can be easier to budget for as it's predictable. It also allows more flexibility.

For example, let's say you have an expensive few months coming up, like the lead up to Christmas. You can always choose to stop the overpayments and go back to your regular monthly repayments.

If you decide to pay a large, lump sum of your mortgage you may end up saving more on the interest. You might also pay your mortgage off sooner if you frequently do this over the course of a few years.

But this option is not without risks. If you overpay a large amount and later decide you need the money for emergencies, it can be difficult to get back.

Pros and cons of overpaying my mortgage

Pros:

• Reduce your debt - overpaying means you're closer to owning your home entirely and so increasing your equity.
• Save money - by reducing the amount of interest you pay overtime.
• Lower your loan to value (LTV) - a lower LTV means when you remortgage you could have access to better rates.

Cons:

• Early Repayment Charges (ERCs) - most lenders let you overpay up to 10% of your loan each year, if you go above that you could be fined.
• Less available cash for emergencies - there's a risk that you won't get your money back if you suddenly face financial hardship, like losing your job.

Things to consider before making mortgage overpayments

• Do you currently have a good mortgage deal? - With recent changes in the Bank of England base rate, you could be seeing lower or higher mortgage rates. If you’ve locked into a fixed-rate mortgage that’s much lower than today’s average, it could make sense to take advantage of that low rate and put any spare money towards overpayments, as long as you can afford to.
• Have you got a pension? - If you’re choosing between overpaying your mortgage and starting a pension, a pension often comes first. Retirement is expensive, and state pensions alone are unlikely to provide enough income.
• Do you have savings in case of emergencies?- It’s vital to have money set aside for unexpected costs before making mortgage overpayments. Once you’ve paid extra towards your mortgage, it’s often hard to get that money back unless you remortgage and release equity. The exception is if you have a flexible mortgage, such as an offset mortgage, which may let you borrow back the amount you’ve overpaid.
• Have you paid off all your debts? - If you’re still carrying high-interest debt (like credit cards or personal loans) it’s usually smarter to pay these off first. Clearing debt not only saves you money in interest but can also boost your credit score, helping you access better mortgage rates in the future.