Should I overpay my mortgage?

As a mortgage holder with some extra disposable income, the prospect of paying it off sooner can be appealing. But if you do want to overpay your mortgage, it’s important to check your lender’s terms and conditions. 

Why overpay your mortgage?  

The most obvious reason to overpay your mortgage is that you’ll be moving a step closer to being mortgage free – a nice position to be in! 

There’s more to it than that, though. As well as reducing your debt, you’ll also bring down the amount of interest you pay. For example, if you have £150,000 left on a 20-year mortgage on a 6% rate and overpay a lump sum of £15,000 (10%), you’ll pay off your mortgage two years and seven months earlier than without the overpayment. And you’ll save £29,600 in interest! 

By overpaying your mortgage, you could also cut your LTV, which is the proportion of your property price covered by your mortgage. A lower LTV might give you access to lower interest rates. So, overpaying on your mortgage could result in an even cheaper deal when you come to remortgage. 

Is overpaying right for me?  

Whether or not overpaying your mortgage is a good idea can depend on the interest you could get in a savings account. If you put £15,000 cash in a savings account paying 4% interest, you’d earn £600 per year, significantly below the saving from the overpayment. 

However, one case where overpayments will likely result in worse outcomes is if you don’t follow your lender’s rules. Most lenders will let you overpay by around 10% a year. After this, you will have to pay Early Repayment Charges (ERC), which are usually between 1% and 5% of the balance. That’s why it’s always best to check the terms and conditions of your deal before making overpayments. 

It is important to take professional advice before making any decision relating to your personal finances. Information within this article is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK.