Should I overpay on my mortgage?

If you overpay on your mortgage, you could pay it off quicker and reduce the amount of interest you have to pay overall. With savings rates typically low, would you be better off putting any extra funds you have towards paying off your mortgage? Read our guide to find out if it’s the right choice for you.

If you overpay on your mortgage, you could pay it off quicker and reduce the amount of interest you have to pay overall. With savings rates typically low, would you be better off putting any extra funds you have towards paying off your mortgage? Read our guide to find out if it’s the right choice for you.

Tobi Owens
From the Mortgages team
5
minute read
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Posted 17 DECEMBER 2020

Should I overpay on my mortgage? Or save my money?

If you can pay off your mortgage quicker, you’ll accumulate less interest on your debt so you’ll pay less overall. It seems like a no-brainer. But would you be better off putting your money into a savings account?

Firstly, it comes down to interest rates. Does the interest rate on your savings account exceed the interest rate you pay on your mortgage? If so, you might be better off keeping your money where it is. If not, overpaying your mortgage could be a better option.

Just like with a savings account, you can make regular payments or pay a one-off lump sum towards your mortgage. Even paying just an additional very small amount regularly could shave months of your mortgage term and potentially save you more on interest than you would gain by putting your money into a low-yield savings account.  

What are the downsides to overpaying?

Some mortgage lenders will apply early repayment charges, so check your terms carefully to make sure you won’t be stumped with a bill for clearing your mortgage debt sooner.

It’s worth considering any other debts you may have and how much you pay in interest on those. Aim to pay off the debt with a higher interest rate first, before you make any overpayments on your mortgage.

It’s important to bear in mind that you’ll lose access to the safety net of any savings you use to overpay your mortgage. In most cases, you won’t be able to dip into the equity of your home like you would a savings account, so be careful not to overstretch yourself. Before you start overpaying, it’s a good idea to set some rainy-day money aside in a savings account that you can access at short notice, if you need to.

How do I calculate if I’m better off saving or overpaying?

To decide if you should overpay on your mortgage, you need to work out if your mortgage rate is higher than the rate on your savings, after tax. Bear in mind that up to £1,000 of the interest on your savings is tax-free.

Remember, too, that if you’re not earning enough interest on your savings, you could be better off switching your savings account.

Compare savings accounts

Can I overpay as much as I want?

Some mortgage lenders will put a limit on how much you can overpay, especially if you’re in the introductory, fixed, tracker or discount period of your mortgage term. This is normally a set percentage of your remaining mortgage – often around 10% per year – but you should check the terms of your agreement.

If you end up overpaying by too much, you’ll potentially face early repayment charges. This is usually worked out as a rate of the amount you’ve overpaid. Normally, the rate decreases the closer you get to the end of your mortgage term.   

If you’re on the standard variable rate, your lender will usually let you overpay by as much as you want. Bear in mind, though, that if you’re paying a high rate of interest on your mortgage, you might be better off remortgaging.

If I overpay can I get the money back?

No, generally speaking, you won’t be able to reclaim any money you overpay. So, if you suddenly need access to cash, then you may need to take out a loan or use a credit card, which could mean you end up in debt at a higher interest rate. That’s why it’s a good idea to have an emergency fund available to draw on, if needs be.

There are some flexible mortgages available, however. For example, offset mortgages, current account mortgages or 'borrow-back' mortgages will let you overpay, then withdraw the money again at a later date, without having to pay a penalty.

Should I overpay on my mortgage or reduce my mortgage term?

Although they both work towards the same goal, it’s a lot safer to overpay on your mortgage than to reduce your mortgage term.

If you change the terms of your mortgage, you’ll be locked in to paying that extra amount each month. And if for some reason you can’t pay, you’ll end up in arrears.

Overpaying gives you a lot more flexibility to pay what you can afford each month, or stop overpaying for a while if you’re hit with an unexpected expense.

How do I overpay on my mortgage?

Give your mortgage lender a call to discuss your repayment options. They’ll be able to give you advice specific to your mortgage and confirm any limits.

And if you want to start overpaying by a set amount each month, they should be able to help you set up a standing order.

To maximise your savings, make sure your lender is aware that you want to overpay to reduce the length of your term. Otherwise, they might assume you want to pay off some of next month’s payment in advance – which is an option on some mortgage deals but won’t save you much in the long run.

If you have a repayment or interest only mortgage, you need to clarify that any overpayments are going towards paying off your overall balance and not just the interest (which won’t reduce your mortgage term).

Does it matter when I overpay?

Ideally, you want to time your overpayments before the interest is calculated, to boost the amount you save. You should check with your lender to see when they re-evaluate interest rates. If the interest is calculated daily, then it makes no difference when you overpay. But if it’s applied monthly, quarterly or even annually, you should aim to overpay just before.

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