Should you overpay your mortgage?

The short answer: yes, if you can.

When you get a mortgage, you agree a minimum amount to pay back your lender each month. Overpaying just means paying more than that, either regularly each month or as a lump sum. It’s something you can usually arrange by getting in touch with your lender.

Overpaying even can make you mortgage-free faster, wiping more of the debt you have to pay and the interest you would have paid on it. Make sure you tell your lender that the reason you’re overpaying is to reduce your mortgage term otherwise they might keep your term the same, and use your overpayment to reduce your monthly payments.

Because the lender makes most of their money from the interest you pay, they only let you overpay by a certain amount before they charge you a fee, usually a maximum of 10% of your remaining mortgage debt. Talk to your lender about the rules and to work out what you can do.

When is it a bad idea to overpay?

  • If you could save more elsewhere. Say you have £10,000. Do you use it to pay off more of your mortgage or put it in a savings account? If the cost of your mortgage debt is higher than the amount you could earn in savings account interest, then it’s probably better to pay off your mortgage. That £10,000 in 1.5% account would earn you £150 interest over a year. But if you put it into overpaying your 5% mortgage debt, you’d save £500 in saved interest.

  • If there’s a penalty fee. Check the early repayment clause in your contract – if you go over the maximum repayment amount, you’ll be charged a fee.

  • If you have more pressing debts to pay off first. If you have high interest loans, it might be better to use your savings to pay those off before you pay off more of your mortgage.

    • Pay off £2,000 debt on 18% credit card → save £360
    • Overpay £2,000 on 5% mortgage → save £100
  • If you want to keep cash for an emergency. Before you put every penny of your savings into overpaying, remember that the value in your home isn’t ‘liquid’… which means you can’t access it easily if you need to. It might be a good idea to keep some cash in your emergency pool.

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