Should I overpay on my mortgage? Here’s what you need to know

If you’ve got extra cash to spare, you might be considering making overpayments on your mortgage.

Overpaying could reduce your monthly repayments, shorten your mortgage term, and save you money in interest. However, it isn’t necessarily the right decision for everyone.

If you’re asking yourself ‘should I overpay on my mortgage?’ this is what you need to know.

Go online to work out how much you could save

Trying to work out how much a mortgage overpayment could save you in the long run isn’t easy, but there are some free online calculators that can help.

For example, Nationwide’s overpayment calculator shows what you could save in interest and how many months you could reduce your term by. It also has a handy graph showing how your mortgage balance will reduce over time.

The table below shows the impact of making a £20,000 overpayment on a £200,000 mortgage with 15 years remaining and a 2% interest rate:

Details With overpayment Without overpayment
Monthly repayment £1,287.02 £1,287.02
Total to repay £225,111.81 £231,663.04
Length of mortgage 13 years and 4 months 15 years
Interest total £25,111.81 £31,663.04

Source: Nationwide

In this example, you could save £6,551 in interest and reduce your mortgage term by one year and eight months.

Large overpayments could attract charges

If you have a mortgage with a fixed, capped or discounted interest rate period, there will usually be a limit to how much you can overpay each year without attracting charges. Often, this is 10% of your remaining balance, although it varies from one lender to another.

If your overpayment is above this limit, you might have to pay an early repayment charge (ERC). Some ERCs are set at a fixed rate of 5% whereas others reduce as you get nearer to the end of your deal.

So, if you have a mortgage of £200,000, you might be able to overpay by £20,000 without paying an ERC. However, if you overpay by £30,000, then the extra £10,000 could attract an ERC of £500 (5% of £10,000).

Sometimes, lenders won’t apply an ERC if you’ve come to the end of your deal and have been moved on to their Standard Variable Rate. This isn’t always the case, so make sure you check the terms and conditions.

It might be better to pay off other debts first

If you have other, more expensive debts, it might be wise to pay off those before making a mortgage overpayment.

The more expensive the debt, the more it will cost you in interest over time. According to Moneyfacts, the average two-year fixed-rate mortgage was 2.38% in October 2020. In contrast, MoneySuperMarket puts the average interest rate on credit cards at 19%.

So, before you tackle your mortgage, check whether you’re paying a higher rate of interest on credit cards, store cards, overdrafts or pay day loans.

Everyone should have a ‘rainy day’ fund

Before you make a mortgage overpayment, make sure you can actually afford it.

You might have £10,000 sitting in a savings account, however, putting that whole £10,000 towards your mortgage isn’t necessarily the best course of action.

Having some money set aside for unexpected events, such as your car breaking down or boiler packing in, can make you better prepared for financial shocks.

It’s generally considered wise to have three to six months’ worth of expenses set aside in a readily accessible account.

Get in touch

If you’d like more information on the impact of making mortgage overpayments, please email enquiry@edinburghmortgageadvice.co.uk or call 0131 339 2281.

Please note

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

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