What is a mortgage overpayment?

An overpayment simply involves making an extra payment on top of your normal monthly mortgage payment. You can do this as a one-off, or negotiate with your lender to make a regular overpayment each month.

You’ll have agreed on your current monthly mortgage repayment in the original deal you made with your lender. The amount will depend on the type of mortgage you have, the amount you’re borrowing, and the agreed term of your mortgage.

Making a mortgage overpayment is just a matter of paying more than your required monthly amount.

To do this, you might choose to:

  • Make an extra payment as one single lump sum

  • Increase your monthly payment amount for your ongoing overpayment

  • Combine both of the above options 

What are the benefits of making overpayments on your mortgage?

As with any loan, paying your mortgage off early often comes with benefits.

Any overpayment you make reduces the amount you owe your mortgage lender. This means you cut down on the time it will take to repay your mortgage, so you’ll pay less money overall to clear your mortgage.

Interest is calculated on your outstanding amount, so reducing the amount you owe your lender lowers the interest payable on your remaining mortgage payments.

By overpaying on your mortgage now and reducing the amount you owe, you’re giving yourself flexibility for future scenarios where you might want to pay less. For example, if you decide to expand your family or take on other loans.

Overpayments on your mortgage come with many benefits, but there are a few disadvantages you need to be aware of.

The disadvantages of overpaying on a mortgage

Some lenders impose an Early Repayment Charge (ERC) for paying off your mortgage early, so make sure to check your terms and conditions, or ask about this when you talk to your lender.

It’s tempting to use a lump sum, such as an inheritance or other windfall, to pay off a mortgage. Just remember you might have unexpected emergency costs in the future and may need some cash on hand for them. 

If your interest on your mortgage is low and you have a high-interest investment available to you, it may pay to invest an unexpected lump sum, and continue to pay your mortgage as usual. 

You can make overpayments on an interest-only mortgage, either to reduce the amount owed or to reduce the amount of time you’ll be paying for.

Not all mortgage calculators work with interest-only mortgages, so it’s a good idea to talk to your lender if you want to overpay on this type of mortgage.

Which kind of mortgage is best if I want to overpay?

Most fixed rate mortgages don’t allow overpayments. If they do, they often come with a fee. However, different types of mortgage can make overpaying an option.

Flexible mortgages are designed for people whose salary is likely to increase at times over the year - if you receive regular bonuses, for example.

Flexible mortgages are attractive because they allow overpayments without charging a fee.

Be aware that some flexible mortgages have higher interest rates than mortgages that don’t allow overpayments and so may not work out cheaper overall.

Some flexible mortgages also allow you to take the money you’ve overpaid out of your mortgage in financial emergencies.

Some tracker mortgages allow fee-free overpayments.

If you think you’ll want to overpay, speak to a mortgage broker to find a deal that suits your circumstances.

Some mortgage deals give you the option of paying up to 10% of your mortgage balance as an overpayment per year in your initial period. Every lender and deal is different, so always check before overpaying.

With a fixed offset rate mortgage you can put up to 100% of the mortgage balance into the offset savings account.

If you had a mortgage balance of £100k, you could use any extra income to put the whole mortgage amount into the savings account, without paying interest.

If you’re on your lender’s SVR, you can usually overpay as much as you like without a charge.

However, paying your lender’s SVR is often unnecessarily costly, and as a result, many UK homeowners are paying much more than they should be.

Before you decide to stay on the SVR, work out whether you’ll save more by staying and overpaying, or remortgaging to save money on a lower rate.

Things to consider before making an overpayment

The most important thing to check before making an overpayment is whether your lender will charge an Early Repayment Charge (ERC).

Depending on your terms and conditions, there might be: 

  • No fee at all

  • A fee for paying more than a certain amount (often 10% above the regular monthly payment)

  • A fee on any amount overpaid

A fee may outweigh the benefits of making an overpayment, so look into this with your lender before making your overpayment.

You may also want to consider whether:

  • You have other, more pressing debts worth clearing first

  • You need to build up your savings

  • You might remortgage at some point (overpayments may affect your loan-to-value ratio, opening up better mortgage options)

  • You can pull back on your overpayment at a later date

As with any decision relating to your mortgage, make sure you have all the information you need to go into the decision fully informed.

Using a mortgage overpayment calculator

Some mortgage calculators work out how much interest you’ll save by making an overpayment. Others show you the reduced mortgage debt, a new time period, and how much you’ll pay monthly.

Before using a mortgage calculator, check if your lender charges an early repayment fee, and how much it is, so you can account for it.

  1. The current amount you owe on your mortgage 

  2. The remaining time on your mortgage 

  3. Your mortgage type

  4. The amount you plan on increasing your monthly payments by, or your lump-sum payment

Once you have that information ready, you'll be able to find out what impact your overpayment could have on your mortgage.

If you decide to make an overpayment on your mortgage, first check that your lender offers this service. If they do, get in touch with them and arrange the best way to make the payment.

Your mortgage lender can give you advice on how to calculate overpayments on your mortgage.

Options available vary from lender to lender. Often you can arrange it all online, but there might be some additional steps.

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