Mortgage overpayments refer to any additional payments you make beyond your regular mortgage repayments. These extra payments can be made in the form of one-off lump sums or increased monthly contributions.
Overpaying on your mortgage can significantly reduce the total interest you pay over the lifetime of the loan, thereby lowering the overall cost of your mortgage.
Types of Mortgage Overpayments
There are a few different ways to make overpayments:
- Lump Sum Payments – If you receive an annual bonus, inheritance or any unexpected sum of money, using it to make a lump sum mortgage overpayment can be an effective way to reduce your loan balance quickly.
- Regular Overpayments – You can opt to pay a little extra each month. For instance, if your standard monthly payment is £500 and you pay £575 instead, you are overpaying by £75 per month. Over time, even small additional payments can make a significant difference.
- Combination of Both – Some homeowners choose to make both monthly overpayments and occasional lump sum contributions, depending on their financial situation.
Whatever way you’re planning to make overpayments on your mortgage, it’s always good to speak to your lender directly to inform them as to the nature of your overpayments.
Am I Eligible to Make Mortgage Overpayments?
Your ability to overpay your mortgage depends on your lender, mortgage type and the terms of your mortgage agreement. Before making an overpayment, it’s crucial to check with your lender to confirm if there are any restrictions or penalties.
Overpaying on Different Mortgage Types:
- Repayment Mortgages – Overpayments go directly toward reducing the principal, helping you pay off your mortgage faster and reducing the interest payable.
- Interest-Only Mortgages – Overpayments may reduce your outstanding balance, leading to lower monthly interest payments. However, the mortgage term remains unchanged unless you pay down the capital.
- Tracker or Offset Mortgages – These mortgages often allow unlimited overpayments, but always verify with your lender to avoid any surprises.
How Much Can I Overpay on My Mortgage?
Most lenders limit mortgage overpayments to a percentage of the outstanding balance per year, typically around 10%. This limit often applies if you are in a fixed-rate or discounted mortgage term.
If your mortgage is on a Standard Variable Rate (SVR), you may be able to overpay as much as you like. However, since SVRs tend to have higher interest rates, remortgaging to a lower rate might be a better financial decision.
Early Repayment Charges (ERCs)
Some lenders impose early repayment charges (ERCs) if you overpay beyond the permitted limit. ERCs usually range between 1% and 5% of the excess amount. For example, if your mortgage balance is £100,000 and your annual overpayment limit is 10% (£10,000), an additional payment of £12,500 with a 5% ERC on the excess amount (£2,500) would result in a £125 penalty.
Despite ERCs, overpaying can still be worthwhile if the interest savings outweigh the penalty. Always review your mortgage terms or consult your lender before making overpayments.
Should I Overpay or Reduce My Mortgage Term?
Overpaying allows flexibility—you can increase, decrease or stop additional payments depending on your financial situation. On the other hand, formally reducing your mortgage term locks you into higher monthly payments, which can be risky if your circumstances change.
Monthly Overpayments vs. Lump Sums
- Monthly Overpayments – Helps with consistent budgeting and offers the ability to adjust contributions based on financial changes.
- Lump Sum Payments – Reduces the outstanding loan balance significantly in one go, leading to lower interest payments. However, once the money is paid, you can’t easily access it again.
- Hybrid Approach – Some homeowners prefer to deposit extra funds into a high-interest savings account first and then make a lump sum mortgage overpayment if they don’t need the money for emergencies.
Advantages of Overpaying Your Mortgage
- Lower Total Interest Paid – Since interest is calculated on the outstanding balance, reducing the principal reduces the overall interest paid.
- Shorter Mortgage Term – Making regular overpayments allows you to clear your mortgage sooner.
- Improved Loan-to-Value (LTV) Ratio – Reducing your mortgage balance increases your home equity, which may help secure better mortgage deals when remortgaging.
- Better Financial Return – If your mortgage interest rate is higher than the return on savings, overpaying can be a more cost-effective option.
Disadvantages of Overpaying Your Mortgage
- Potential Early Repayment Charges – Some lenders impose penalties for excessive overpayments.
- Other Debts May Have Higher Interest – If you have high-interest debts (e.g., credit cards), paying them off first may be more beneficial.
- Reduced Financial Flexibility – Overpaying ties up funds in your property, making it difficult to access in case of an emergency.
- Alternative Investments – If you could earn a higher return elsewhere (e.g., stock market investments), overpaying might not be the best financial decision.
How to Make Mortgage Overpayments
- Check Your Mortgage Terms – Speak with your lender to confirm limits, ERCs and the correct payment method.
- Set Up a Standing Order – If you plan to overpay monthly, a standing order ensures consistency.
- Ensure Overpayments Reduce Capital – Inform your lender that overpayments should go toward reducing the principal, not just future interest payments.
- Monitor Your Mortgage Balance – Regularly check your statements to track progress and ensure overpayments are applied correctly.
Is Overpaying Right for You?
The decision to overpay your mortgage depends on your financial situation. Consider:
- Your mortgage interest rate vs. potential returns on savings or investments
- Any penalties or restrictions from your lender
- Your need for liquidity and emergency savings
- Outstanding debts with higher interest rates
Need Mortgage Advice?
Mortgages are complex financial commitments. Consulting a mortgage adviser can help you assess whether overpaying is the right move for your circumstances.
For personalised guidance and access to a comprehensive range of mortgage options, consider reaching out to us, our qualified whole-of-market brokers stand ready to assist you in making the right choice for your financial future.
