Overpaying my mortgage
What is a mortgage overpayment?
Making an overpayment is when you’re paying your mortgage provider a larger amount than you’re supposed to pay. You can do this either by:
- making a one-time lump sum payment
- adjusting your monthly repayments so that they’re always greater than the specified amount
Depending on your lender, interest on your mortgage may be calculated daily, monthly, quarterly, or annually. If interest is calculated daily or monthly, the timing of your overpayments won’t matter. But if it’s only calculated periodically, you should coincide your overpayment with the calculation or you won’t make any savings.
Before making an overpayment, you should consider the following:
- Not all lenders allow overpayments.
- Overpayments mean less interest for lenders and therefore less money for them, so they may charge hefty fees to dissuade you.
- Fees can be as high as 5% of the overpaid amount. You may find that this cost cancels out or exceeds the benefits of overpaying.
- Many lenders allow overpayments of up to 10% of the outstanding amount each year during the term of a fixed rate mortgage. Once the term ends and you’re switched to the standard variable rate, many lenders won’t apply any restrictions, whilst others will charge for overpayments at every stage of the mortgage.
- If you don’t have any savings and only limited extra cash, you may want to building them up before you think about overpaying.
- Other unsecured debts such as personal loans and credit cards carry higher interest than your mortgage, so if you have any, it’s best to settle these before overpaying.
- Unlike putting your extra cash into a savings account, any overpayments made towards your mortgage won’t be able to be accessed again until you sell your property.
What are the benefits of overpaying my mortgage?
Making overpayments has three main benefits:
It can help you pay off your mortgage sooner. The extra amount you overpay goes entirely towards repaying the mortgage itself, not on any interest you owe. This means you could shorten the amount of time you need to repay the mortgage in full.
It can lower the amount of interest you have to pay. Since overpayments pay down the mortgage itself, you could significantly cut down the amount of interest you have to pay. This is because the interest you’re charged is calculated on the outstanding amount you owe. If your outstanding amount is lower, the amount of interest calculated will be lower too.
It can give you increased flexibility. Overpayments put you ahead of schedule by covering the cost of specified repayments for many months. This opens up the option of underpaying down the line. Not all lenders will allow you to do this.