What if I paid off my mortgage faster?
Mortgage Overpayments Explained: Limits, Savings and What to Check First
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This guide provides general information only. It is not financial advice or a personal recommendation and does not take account of your individual circumstances.
Quick answer
Overpaying a mortgage reduces the balance, so you pay less interest and can clear the mortgage sooner. Many deals allow overpayments of up to 10% a year without a charge. Before overpaying, it usually makes sense to clear more expensive debts, keep at least three months of living costs in savings, and check pensions and life cover.
Key figures
- a year is a common overpayment allowance without a charge
- 10%
- interest saved by a £5,000 lump sum on a £250,000, 5%, 25-year mortgage (MoneyHelper)
- £11,970
- of living costs is the minimum savings buffer MoneyHelper suggests first
- 3 months
How overpayments work
An overpayment is any amount you pay on top of the normal monthly payment, either as a regular extra amount or as a one-off lump sum. It goes straight off the balance, so future interest is charged on a smaller amount.
MoneyHelper's example: on a £250,000 mortgage at 5% with 25 years left, a single £5,000 overpayment saves £11,970 in interest and ends the mortgage 11 months early. The overpayment calculator runs the same sum with your own figures.
Reduce the term or the payment?
After an overpayment, lenders typically either keep the monthly payment the same, so the mortgage ends sooner, or recalculate it lower over the same term. Policies differ, so ask your lender how it applies overpayments and whether you can choose.
Check the limits first
- Annual allowance. Many fixed and discounted deals allow up to 10% of the balance a year without a charge. Going over can trigger an early repayment charge.
- Standard variable rate. Overpayments are usually unlimited once you are on the SVR. See when my fixed rate ends.
- Flexible and offset mortgages can let you overpay and take the money back out later.
- Timing. If interest is calculated daily, an earlier overpayment saves more than a later one.
What to consider before overpaying
MoneyHelper suggests checking these first:
- More expensive debts. Credit cards, store cards and personal loans usually cost more than a mortgage, so clearing them first usually saves more.
- An emergency fund. Keep at least three months of living costs. Money paid into a mortgage is hard to get back out.
- Pensions. Tax relief and employer contributions can be worth more than the interest saved.
- Protection. If anyone depends on you, check how they would manage if you died. Life insurance explained covers how that cover works.
- The alternative return. Overpaying makes most sense when savings would earn less, after tax, than the mortgage rate.
Overpaying or remortgaging?
They work together. Overpaying lowers the balance, which can lower the loan to value and open up cheaper rate bands at the next deal. Remortgaging explained covers how loan to value affects the options.
Overpayment checklist
- What is the annual overpayment allowance on this deal?
- Does the lender reduce the term or the payment, and can you choose?
- Are more expensive debts cleared?
- Is there at least three months of living costs in savings?
- Would the money do more in a pension or savings account?
Frequently asked questions
Many deals allow up to 10% of the balance a year, but the limit depends on the mortgage. Check your mortgage offer or ask the lender. On a standard variable rate, overpayments are usually unlimited.
It depends on the interest rates and your circumstances. Overpaying tends to make more sense when savings would earn less than the mortgage costs, and once an emergency fund is in place and more expensive debts are cleared.
Not usually. With a standard mortgage, money overpaid is not normally available to take back out. Flexible and offset mortgages are the main exceptions.
Some lenders reduce the payment and keep the term, others keep the payment and shorten the term. Ask your lender how it treats overpayments.
Sources
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