Lump Sum Mortgage Overpayment
If you’ve got a cash lump sum, is paying off some or all your mortgage the smart thing to do? Or are there other options that would be better financially?
If you’ve got a cash lump sum, is paying off some or all your mortgage the smart thing to do? Or are there other options that would be better financially?
What is mortgage overpayment?
A mortgage overpayment is an extra payment you make in addition to your normal monthly payments to your mortgage provider. If you have a repayment mortgage, you can overpay by paying more every month or with a lump sum.
Overpaying your mortgage means that your outstanding balance will reduce and you’ll pay less interest overall, so you can pay the mortgage off sooner and reduce the total cost.
If you have an interest-only mortgage. you can repay lump sums to reduce the outstanding balance and enjoy lower monthly interest payments but the mortgage term will remain the same. Alternatively, you might want to put a lump sum towards your final capital repayment.
See more in our guide to overpaying your mortgage.
Mortgage overpayment with a lump sum
If you’ve come into some money, for example a bonus or an inheritance, you could be contemplating making a lump sum payment on your mortgage - or if you’re lucky enough, paying off the whole thing. But is a lump sum overpayment more beneficial than putting the money into savings?
- Imagine your outstanding mortgage is £175,000 at 3% interest and you’ve got 17 years left to pay it off.
- If you paid off £20,000 with a lump sum it would mean that you’d pay £9,660 less in interest and pay off your mortgage two years and five months earlier.
- By comparison, if you put the same £20,000 into savings, with current rates of interest, you’d be earning less in interest than you’d be paying out on mortgage interest.
To work out how much you could benefit by making a lump sum overpayment, try our partner London & Country Mortgages’ mortgage overpayment calculator This is a good place to start to work out if it’s the right thing for you to do with the money.
Can you pay off only part of your mortgage with a lump sum?
Yes, you can pay just some of your mortgage or all of it with a lump sum overpayment. It’s up to you and what you can afford.
The one thing you need to watch for when making an overpayment is whether there are any early repayment fees. Many mortgage providers will allow you to overpay by 10% in a year, but will charge a fee if you go above this figure. So if you want to pay more than your provider permits without penalty, you’ll have to do your sums carefully to make sure it’s worth it.
The advantages of paying off part of your mortgage with a lump sum
There are a number of advantages:
- Overpaying can take years off your mortgage – meaning you’ll be mortgage-free sooner
- You’ll pay less overall as you’ll no longer have to pay interest on the amount you overpay
- The savings on overpaying your mortgage can be higher than the interest your money would earn in savings.
Making a lump sum overpayment may also have beneficial effects when you come to remortgage as it can lower your loan to value ratio (LTV). This is the ratio between the value of the mortgage you take out and the value of the property. It’s shown as a percentage. The lower the LTV, the better mortgage rate you’ll be offered.
Lenders usually have LTV ‘bands’ that go up in 5% increments. If your lump sum can bring your LTV down a band, you’ll potentially benefit from a lower interest rate when you remortgage.
The disadvantages of paying off your mortgage with a lump sum
If you’ve got high-interest debts such as personal loans, car loans or credit cards where you’re paying a higher rate of interest than your mortgage, you may be better off using your lump sum to pay those off.
Also bear in mind that if you pay more than is allowed by your provider, you may have to pay additional fees.
When should you pay off your mortgage with a lump sum?
Timing your payment may be important if you’ve got a long-standing mortgage where the interest is calculated annually or quarterly.
Putting the money into savings and then paying a few days before the calculation is made will maximise the benefit to you. If you have a large lump sum to overpay, ask the mortgage company if it will make a calculation, even if it's not the calculation date. Some may be willing to do this.
Are there any additional fees involved for lump sum mortgage payments?
This will depend on your mortgage terms. You may have to pay an early repayment charge if you pay more than your overpayment allowance (which is usually 10% of the mortgage balance per year). These charges can vary between around 1% and 5% of the overpayment.
If you’re on a standard variable rate mortgage (SVR), you may be able to overpay as much as you wish, but you might be better off remortgaging as SVRs are expensive.
Make sure you know the time period that the early repayment penalty applies to. For some lenders it’s the previous 12 months, while for others it’s a calendar year or based around the anniversary of your mortgage.
If you don’t want to pay fees, look at whether it would make sense to split your lump sum and make payments over two years. You’ll need to do the sums to make sure that is the most beneficial thing to do.
How do you pay off your mortgage with a lump sum?
The best thing to do is to start by calling your lender. You can check whether a lump sum payment will be allowed without a penalty. You can also make it clear that you want to use the lump sum to pay off your outstanding capital, rather than reducing the size of your next repayment.
How else can you overpay your mortgage?
As well as paying a lump sum, you can also overpay your mortgage monthly – even an additional £10 or £25 can make a real difference over time.
What other options are available to pay your mortgage off earlier?
There are a few options:
- Reduce the term of your mortgage – this means you’ll be tied into higher monthly payments for the remaining time left on your mortgage so you need to make sure the repayments are affordable. If your income drops at a future date, you may face problems.
- Remortgage with a new provider at a lower rate and continue to pay the same amount as you are currently, or opt for a shorter term with the same monthly repayment
- Consider an offset mortgage – this type of mortgage is linked to a savings account. You could put your lump sum into the account and you’d be able to access it if needed. But your monthly mortgage payments would increase if you withdrew cash from your savings.
Should I overpay or remortgage for a smaller amount?
This will entirely depend on you and your circumstances. For example, if you’ve got a fixed-term mortgage at a favourable rate and you won’t be able to switch to a lower LTV loan, then overpaying might be the best option. If it’s nearly time to remortgage, then you might want to consider the best way of using the lump sum. It might be worth exploring the possibilities with a broker.
Should I leave a small amount of money on my mortgage?
would then keep the deeds somewhere safe. But this isn’t necessary now as deeds are kept electronically by the Land Registry.
Likewise, people used to leave a small amount to make it easier to borrow again from that lender if they needed to. But it makes no difference now as every loan has to have a new application and be checked for affordability.
