Overpaying your mortgage

If you’ve got spare savings available, using them to overpay your mortgage can reduce the amount of interest you pay overall and help you pay off what you owe early.

Paying off your mortgage early is a pretty appealing prospect for most people, so it’s little wonder that many of us plough any cash we don’t have an immediate need for back into our homes.

According to research by Leeds Building Society, 24% of people who received cashback as an incentive for their mortgage deal said they’d put the money straight into overpaying their new mortgage.

Matt Bartle, director of products at Leeds Building Society said: “Of course, borrowers can choose how to spend their cashback and it’s positive to see that people would use the funds to cover costs associated with moving and in some cases overpay to reduce the size of a loan immediately.”

Effect of overpayments

Whilst few of us will ever be fortunate enough to suddenly have a big lump sum that would enable us to clear our mortgage in full, overpaying by even a small amount each month can have a dramatic impact.

For example, someone with a £150,000 repayment mortgage on a 25 year term, at an interest rate of 2.25%, making monthly overpayments of £50 would shave two years and four months off their mortgage term and pay £4,608 less in interest.

If they overpaid by £100 a month, they’d reduce your mortgage term by four years and three months and pay £8,370 less in interest. Overpaying can be a particularly good move when interest rates are very low, as the interest you’re charged on your mortgage is likely to be more than the interest you could earn on your savings.

The amount you’ll be able to save by overpaying your mortgage will depend on how much you owe, your mortgage rate and term, and how much you plan to overpay by. Our overpayment calculator can help you work out how much overpaying could save you. All you need to do is enter the size of your mortgage, the rate you are paying and the amount you plan to overpay, and the calculator will do the rest.

Consider the downsides

Whilst overpaying can have huge financial benefits, it’s important to remember that some mortgage products offer more flexibility than others, so getting access to that money if you need it can be difficult.

It’s sensible therefore to make sure you have a sizeable rainy day fund in place before you consider making mortgage overpayments, so that you won’t be short of savings in the event of an emergency.

It’s also important to check with your lender how much you can overpay. Most mortgages will carry an Early Repayment Charge during the deal period. However, the vast majority will allow some overpayments without incurring a charge, typically up to 10% of the mortgage balance each year although it can vary by product and lender. If you exceed the limit you could be charged a potentially hefty Early Repayment Charge, so always check your mortgage terms and conditions carefully first.