
Should I overpay my mortgage?
It's a question of whether you save, or whether you overpay your mortgage
With savings rates at rock bottom, overpaying on your mortgage is often a no-brainer as it's an easy way to save £10,000s in interest. But it's not right for everyone – you'll lose access to the cash and could face repayment penalties. This guide helps you decide if it's right for you.
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Overpaying often wins – but not for all
Get it right and overpaying your mortgage can be a huge cash boost, because...
- You'll be eating into the debt you've built up from buying a home, meaning you pay it off quicker.
- You don't pay interest on the amount you overpay.
- The money you'd save on interest often beats the returns possible by putting it in savings, given savings rates are currently so pitiful.
Overpaying means you make the same gain as saving at your mortgage rate. If you've a 2% mortgage, you'd need savings paying at least this. And, if you've used up your personal savings allowance, you need savings paying even more; higher-rate taxpayers'd need to earn 5% – impossible to get on any savings account now.
Here's a real-life example of someone who's saved big by overpaying their mortgage:
Started making overpayments on my mortgage seven years ago. Saved £18,600 in interest and paid up eight years and three months early. So my ex-mortgage payment can now go towards a fantastic retirement pot.
- Debbie
But before you chuck all your savings at your mortgage, you need to check the following...
Check 1 - Can you overpay without penalty? Most can overpay 10% per year, but get it wrong and you risk £1,000s in fees
Most lenders allow you to pay 10% of your mortgage balance as an overpayment per year if you're still in your introductory fixed or discount period.
If you're on a tracker mortgage, or you're beyond that intro deal and paying your lender's standard variable rate (SVR), you can usually overpay by as much as you want. But many SVRs are expensive, so if on one it's best to check if you can save by remortgaging, rather than only overpaying.
However, the 10% rule is not universal. Some lenders punish those who try to overpay by more (see the What type of mortgage to choose guide for details).
Fees for paying too much are typically between 1% and 5% of the amount overpaid depending on your mortgage, though the fee you pay usually decreases the closer you are to the end of the fixed or discount period. The amount you pay as a penalty will vary between mortgage deals.
Say you've a five-year fix on a £100,000 mortgage and decide to overpay a lump sum two years into the deal. However, instead of sticking to the 10% (£10,000) limit free of penalty, you overpay £15,000 instead.
This means you must pay a 3% penalty on the extra £5,000 overpayment – £150. However, this 'percentage left on loan' rule of thumb is very rough, so always double-check with your lender.
The reason for such harsh penalties is because lenders want you to stick with them once the cheap rate ends and because they've also budgeted to earn a certain amount of interest from you during the mortgage deal, and overpaying means they'll get less.
Check 2: Do you have other, expensive debts? If so, clear those first
A crucial rule of debt repayments is: clear the most expensive debts first. Do so and the interest doesn't build up as quickly, saving you cash and giving you more chance of clearing debts earlier. Therefore, as a rule of thumb...
Clear high-interest credit cards and loans before overpaying your mortgage, as they're usually more expensive.
There are a few debts you probably shouldn't pay off before your overpaying your mortgage, including these....
Check 3: Do you have a sufficient emergency fund?
I often say it's worthwhile having a cash emergency fund for those who are debt-free - apart from their mortgage (for people with expensive cards and loans debts I generally say you should Use Savings To Repay Debts?).
Yet, when you overpay most mortgages the cash is gone. So if you've an emergency (leaking roof or redundancy, not new shoes) and you'd overpaid with all spare cash, you could be forced to borrow again instead. Your earlier overpayments may not stop lenders charging you for being in arrears if you miss monthly repayments (see Mortgage Arrears Help).
So it's always a good idea to keep an emergency fund in a top savings account – I always say three to six months' worth of cash is a good guide, enough to live on if you lost your job, for example. If you're thinking of using newly arriving extra income (such as a pay rise) to overpay your mortgage, then build up an emergency fund first.
This applies even if the calculator shows you'd be better off overpaying your mortgage. It's what's known as 'a premium for liquidity'. In other words, it's sacrificing some interest for easy access to cash when needed.
The exception – mortgages with flexible features
Mortgages with flexible features (including offset, current account mortgages or those with a 'borrow-back' facility) allow you to overpay and borrow the money back. So you can overpay the mortgage, then withdraw cash without penalty if you need it again. If you have one of these, there's no problem putting all spare cash in the mortgage.
It can be used like a high-rate savings account as you're effectively saving at your mortgage rate but without paying tax. That said, as mentioned earlier, this is less beneficial as all savings accounts give you all the interest without tax taken off thanks to the new personal savings allowance.
This example shows how it can work:
On a £150,000, 25-year mortgage, offsetting £25,000 of savings could mean you pay off your mortgage one year and 10 months early, and save £3,350 in interest, while still having access to your savings if needed.
Don't misread this as saying everyone should go for one of these mortgages. The problem is their interest rates are usually higher than standard mortgages', and for many the extra cost of the mortgage debt more than outweighs the gain on savings.
But some of these flexible features are not well publicised so check with your lender if you have this option.
Check 4: Are your savings rates as high as possible?
Before you say "my interest rate is crap, so I'll overpay my mortgage", you need to check if you can boost the rate you're getting. I know it's hard at the moment with savings rates so low, but it's worth knowing this isn't a question of whether overpaying your mortgage beats your current savings. Instead, it must be "does repaying my mortgage beat the highest-paying savings available?"
Many people earn pitiful rates, and assume they can't improve them. Yet better deals are often available. So if you haven't already, check the Top Savings Accounts and Top Cash ISA guides for all the best rates.
You needn't switch to them right now, as overpaying your mortgage may win out. But at least know what's on offer, and compare against that to calculate the right option.
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Overpaying vs saving – which wins?
If you've got this far, I'm going to assume you're debt free (or your debts are at 0%, or cheaper than your mortgage), you have an emergency fund, you know what the best rate you can get on your savings is, and have a mortgage that allows some level of penalty-free overpayment.
So now you need to check whether you should overpay your mortgage or save the cash elsewhere. Overpaying your mortgage is all about this key decision. And what you should do depends on what makes financial sense. The simple rule of thumb is:
If you can get a higher rate on your savings than you pay on your mortgage, saving wins. But if your mortgage rate is more than your savings rate, then it makes sense to overpay.
A simplified example should help...
If you've £10,000 mortgage debt at 1.99%,
Annual interest cost is: £199
If you have £10,000 savings at 0.5%,
Annual interest earned is: £50
Pay off the mortgage with the savings and you are £149 a year better off. We've not included tax deductions in the example as the new personal savings allowance means most people don't pay tax on bank interest received.
Overpaying vs saving - which wins for you? Take my test
I've built a calculator which tells you how much interest you would need to get on a savings account to beat overpaying your mortgage. Just enter your mortgage rate and select your tax rate to find your magic number (if all interest's covered by the personal savings allowance, as it will be for 95% of people, select the PSA button)...
Once the calculator tells you what savings rate you need, check out the Top Savings Accounts or Top Cash ISA guides to see what's currently available. For the vast majority of people, making extra mortgage repayments wins as savings rates are currently so low.
Calculate how much you'll save by overpaying your mortgage
Overpaying can save you £10,000s over the lifetime of a mortgage. And, as the table shows, overpayments don't have to be big bucks. Even £50 or £100 a month can dramatically reduce the interest you pay, shorten your mortgage term, and - in the current climate of spitworthily-low interest rates - will smash savings interest out of the park...
How much will overpaying your mortgage save you?
SAVING/ OVERPAYMENT PER MONTH | MORTGAGE TERM REDUCTION | TOTAL INTEREST SAVED OVERPAYING A £150K MORTGAGE AT 1.99% (1) | INTEREST IF YOU SAVED THE OVERPAYMENT AT 0.5% (2) |
---|---|---|---|
£10 | Five months | £870 | £190 |
£50 | Two years, three months | £3,990 | £810 |
£100 | Four years, two months | £7,260 | £1,355 |
£200 | Seven years, two months | £12,300 | £1,975 |
£500 | 12 years, six months | £21,080 | £2,410 |
£1,000 | 16 years, eight months | £27,700 | £2,680 |
(1) The mortgage has a 25-year term. (2) Savings are pre-tax and stop as soon as the mortgage is paid off to make the comparison fair. |
You can save such large sums of interest by overpaying because overpaying doesn't just get rid of the debt – it gets rid of the interest you would have paid on that bit of borrowing in the future too.
Use our Overpayment Calculator to reveal your savings. Remember, you also need to work out how much interest keeping your cash in savings would earn over the same time period, and subtract this from your profit for overpaying.

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How do I overpay my mortgage?

If you've done all the sums and you think overpaying your mortgage is the right decision, then the simplest way, at least the first time you do it, is to give your lender a call. This way, you can check it's allowed, and also ensure your overpayment(s) are used the right way.
When you make an overpayment, your lender may offer you two options: either to reduce next month's payment by the amount you've overpaid, or to keep payments the same and reduce your mortgage term instead.
This is something to watch for – if you get it wrong, it means your overpayment won't actually help you out that much. If you get this choice always, always tell your lender you want to reduce the term of your mortgage.
If your overpayment goes to reduce next month's payment, it just means that you're paying slightly early, so you save some interest, but not much. You'd still repay almost as much as you would sticking to contractual payments, and – crucially – you won't have reduced the term of your mortgage.
Be very clear that you want all future overpayments to reduce the term of your mortgage. Once you've agreed this, you can usually make overpayments through online banking by setting your mortgage account up as a new payee, then making payments as and when you wish.
If you want to overpay the same amount every month, you can set up a standing order to your mortgage account.
Quick questions
Remortgaging? Overpaying could mean you save twice over...
If you're overpaying your mortgage, you don't just get the advantage of paying interest on a smaller amount of debt. Overpaying also means your loan to value ratio falls faster.
And if your LTV falls, it means when it comes to remortgaging, you may be able to get a cheaper deal than if you hadn't overpaid.
Therefore if you've got a sizeable savings pot, or you're overpaying month by month, by using savings to reduce your mortgage borrowing and cutting your LTV, you may get access to cheaper rates.
In truth, you'll need to be close to one of the key trigger LTV thresholds – where acceptability increases substantially and cost drops – for overpaying to make a difference. But if you are, the savings are huge. As a rough rule of thumb, the main thresholds are:
95% LTV: Above this, you won't be able to remortgage at all.
90%, 85%, 80%, 75% and 60% LTVs: Go below each of these and the top mortgage deals get cheaper.
Rates get cheaper as your LTV drops...
TABLE_CELL_STYLE | TWO-YEAR FIX EXAMPLES | FIVE-YEAR FIX EXAMPLES |
---|---|---|
90% | 3.39% | 3.05% |
80% | 1.76% | 1.97% |
75% | 1.59% | 1.75% |
60% | 1.28% | 1.45% |
Rates for £200,000 property, 25-year term, correct as of Oct 2020 |
How to cut the cost of your mortgage
If you are close to an LTV band, or you're coming to the end of a mortgage deal, it's worth checking the market as mortgages have never been cheaper. Take a quick look at our Mortgage Best Buys tool to see what rates are available or find a broker to help you search in our Cheap Mortgage Finding guide.
Ready to remortgage? I've lots more guides, tools & tips to help…
- Mortgage Best Buys – find your top mortgage deals.
- Remortgage Guide – Download my free PDF guide


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