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Should I overpay my mortgage?

Should I overpay my mortgage?

It's a question of whether you save, or whether you overpay your mortgage

Martin Lewis
Martin Lewis and Money Team
Updated 14 March 2023

Interest rates on mortgages are high right now compared to years past, so overpaying your mortgage should be a serious consideration (if you have the cash). Many can save £10,000s. Yet rates on savings have improved, so those on older mortgages may actually do better in savings. This guide helps you decide what's best for you.
 

This guide was originally written by Martin Lewis, and is now updated by the MSE Money Team.

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Overpaying your mortgage often wins over savings – but not always

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 can be mortgage free sooner (it's important to make sure any overpayments reduce the debt and shorten the term, rather than reduce your monthly payments).

  • You don't pay interest on the amount you overpay.

  • The money you'd save on interest often (but not always) beats the returns possible by putting it in savings.

The gains can be worth £10,000s. 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 working out whether overpaying your mortgage is right for you isn't always straightforward. The first thing to do is check whether you should overpay your mortgage or save the cash elsewhere. Overpaying your mortgage is all about this key decision. The simple rule of thumb is:

KEY RULE: If your mortgage rate is around the same, or higher than your savings rate, then it makes sense to overpay... (even if it isn't, overpaying might still win) 

That's because when it comes to savings, the reverse isn't automatically true. A higher savings rate could beat overpaying your mortgage, but it won't always. It will depend on a number of things, including whether you are planning a one-off overpayment or if you want to overpay regularly (say monthly) over the longer term, how much your mortgage debt is and how many years you have left to repay your mortgage.

The best way to establish what's best is to use our Should I overpay my mortgage? calculator below to see whether saving or overpaying your mortgage comes out on top. The section below tells you more about how to measure the saving. Then read on in this guide for how to actually make overpayments, if it's likely you'll save. 

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 – with interest rates still relatively low – will normally overshadow savings interest...

How much will overpaying your mortgage save you?

SAVING/ OVERPAYMENT PER MONTH MORTGAGE TERM REDUCTION TOTAL INTEREST SAVED OVERPAYING A £150K MORTGAGE AT 4% (1) INTEREST IF YOU SAVED THE OVERPAYMENT AT 3% (2)
£10 Six months £2,092 £1,400
£50 Two years, five months £9,508 £5,840
£100 Four years, four months £17,082 £9,585
£200 Seven years, five months £28,429 £13,400
£500 12 years, eight months £47,457 £15,630
£1,000 16 years, nine months £61,285 £13,450
(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 it 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.

It's worth knowing this isn't a question of whether overpaying your mortgage beats your current savings. It should be a question of whether overpaying beats the highest-paying savings available.

Too many people are still earning pitiful rates when much better savings rate are actually available. So if you haven't already, check the Top Savings Accounts and Top Cash ISA guides for the top-paying accounts.

That aside, overpaying your mortgage may still win out over a higher savings rate, especially if you are planning a regular overpayment over a longer period of time, so use our calculator to see which option will work best for you.

Now use our overpayment calculator to see how much you'd save...

To get a better idea of exactly how much overpaying on your mortgage could save you, use our:

Mortgage overpayment calculator

As well as letting you put in both one-off and recurring mortgage overpayments, it also gives you an indication of what you'd earn in interest if you put your cash in a savings account instead.

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Looks like you'd win by overpaying? The three things you MUST check first.

If you've got this far, I'm going to assume you've got some spare cash and, after using our calculator, it looks like you'd do better to use it to overpay on your mortgage rather than put it into savings.

But before you chuck all your savings at your mortgage, it's crucial that you first check the following...

Check 1: 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....

  • Student loan debts

    This specifically refers to official loans from the Student Loans Company.

    Students who started university in 2011 or before, plus Northern Irish & Scottish students starting any time

    For students who started university or college in 2011 or before, interest is set at the lower of base rate plus one percentage point, or the rate of inflation (RPI), making it the cheapest possible long-term debt. It's possible, if inflation is high and interest rates are low, you may have a mortgage that's cheaper than the student loan but over the long term, that's unlikely.

    Plus, unless you're earning over a set threshold (the exact amount depends on whether you started before or after 1998) you won't have to make monthly loan repayments anyway. Due to the odd nature of these loans and how you repay them, you should prioritise your mortgage over repaying these.

    Students who started university in 2012+ in England & Wales

    For these students, interest is charged at the rate of inflation plus 3% while you're studying, then on a sliding scale from RPI to RPI+3% depending on how much you earn. So, for most students this applies to, it's actually likely that you'll pay a higher interest rate on your student loan that you will on your mortgage.

    However, that doesn't automatically mean that you should pay your loan off above overpaying your mortgage. Whether you should overpay your loan depends on whether you're likely to pay it all back before it's wiped in 30 years' time. Many won't, and if all your student loan overpayments are doing is depriving you of extra cash now, then it's not worth it.

    For more information see Should I repay my student loans?

  • Credit card debt at 0%

    It's arguable that those who are financially savvy, with top credit scores, strict organisation and timekeeping who disloyally shift from 0% credit deal to 0% deal (see the best balance transfers guide) should also pay their mortgage off before their credit cards, as even with balance transfer fees they're cheaper than most mortgages.

    However, this strategy should only really be adopted by the extremely financially competent. For anyone who doesn't trust themselves to stay disciplined, it's generally best to clear card debts first, even at a short-term 0%

Check 2: Can you overpay without penalty? Most can overpay 10% per year, but get it wrong and you risk £1,000s in fees

How much you can overpay depends on what sort of deal you have...

  • If you're on a fix or discount mortgage deal. Most lenders allow you to pay 10% of your mortgage balance as an overpayment per year without penalty.

  • If you're on an SVR (and some trackers). Here you can usually overpay by as much as you want (best to check if you're on a tracker). Many SVRs are expensive though, so if on one it's best to check if you can save by remortgaging, rather than only overpaying.

However, even if your lender does allow overpayments, if you overpay more than it allows, you'll usually be charged a fee, typically between 1% and 5% of the amount overpaid.

An example will help...

Say you've a five-year fix on a £150,000 mortgage and decide to overpay a lump sum two years into the deal. However, instead of sticking to your lender's 10% (£15,000) limit free of penalty, you overpay £20,000 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 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.

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.

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, such as offset mortgages

    Mortgages with flexible features (such as offset 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 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.

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Overpaying could mean you save twice over when you come to remortgage...

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 so, 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 can be 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% 4.90% 4.47%
80% 4.58% 4.29%
75% 4.33% 3.98%
60% 4.33% 3.98%
Remortgage rates for £200,000 property, 25-year term, correct as of March 2023

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 important to check the market to see if you can find a better deal. 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.

How do I overpay my mortgage?

If you've done all the sums and checks above and 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 you're paying slightly early, so you save a few days' 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 your mortgage term.

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. Or, if you want to overpay the same amount every month, you can set up a standing order.

Quick questions

  • Should I overpay my mortgage each month or ask my lender to officially reduce the term?

    The answer to this, almost always, is that you should overpay – if you have the choice.

    Decreasing the term sounds sensible, and does almost exactly the same job that overpaying does – both mean you pay more each month, you pay less interest, and your mortgage is paid off sooner.

    However, if you've locked in to a contract with higher monthly payments, it means if you suddenly have a shock to your income, or if you're on a variable rate and interest rates rise, you might quickly start to struggle. If you're overpaying, you can stop the overpayments, which gives you more wiggle room if problems do arise.

    Read my blog for the full pros & cons of overpaying your mortgage versus shortening the term.

  • Can you overpay an offset mortgage?

    Usually you can, yes. But think carefully, because you're already sort-of overpaying with your offset.

    An offset mortgage keeps your mortgage debt and savings in separate pots with the same bank or building society. Though the big difference is your cash savings are used to reduce – or 'offset' – the amount of mortgage interest you're charged.

    So, if you've a mortgage of £150,000 and savings of £15,000, then you only pay interest on the difference of £135,000.

    The big difference between offsetting and overpaying is that for most mortgages, if you overpay, that money is gone from you forever. You can't get your hands on it if you're suddenly short of cash. But, in an offset, the savings remain yours and can be withdrawn whenever you want with no problem (but obviously then it no longer offsets your mortgage debt).

    So, think carefully before turning offsetting into overpaying...

  • Does it matter when I make overpayment(s)?

    Not usually, as most mortgages calculate interest daily, meaning that whatever day you overpay, your interest the next month is calculated on your new, lower balance – this is the ideal if you're an overpaying borrower.

    But if you've got an older mortgage (10+ years), you might need to be on the ball to time your overpayment correctly, as it's possible your interest may be calculated monthly, quarterly or annually instead. If you're unsure, it's best to check your mortgage or call your lender to see which it is.

    The less frequent their calculations, the more important it is to plan the timing of your overpayments. With monthly- and especially annually-calculated mortgages, it's crucial to time any extra repayments correctly for one simple reason.

    Mortgage overpayments will only count AFTER the calculation's made. Put it in at the wrong time and you'll miss out.

    An extreme example should help to simplify this...

      DONE WRONGLY DONE RIGHT
    Mortgage type Annually calculated Annually calculated
    Mortgage rate 5% interest 5% interest
    Calculation date 2 May 2 May
    Amount overpaid £10,000 £10,000
    Overpayment date 3 May 1 May
    Interest reduction over year Nothing £500

    In this example, if you missed the annual date you'd be better off putting the money in a top cash ISA or easy-access savings account so you're earning interest in the meantime. Then arrange to make the mortgage overpayments a few days before the calculation is made.

    If you have a substantial lump sum to overpay, ask the mortgage company if it will automatically make a calculation, even if it's not the calculation date. Many will do this for you, though you may need to be overpaying a minimum of about £500-£1,000.

    The above all applies to interest-only mortgages too – if you make overpayments, lenders should apply these to the outstanding debt, and cut your monthly interest payments from the next calculation date. If your overpayment significantly dents the debt, it may make moving on to a repayment mortgage an affordable option.

  • Would I do better investing rather than saving?

    Now we hit 'interest'-ing territory (forgive the pun). Investing means putting money in a financial product that involves taking a risk in the hope the money will grow more quickly, although equally, you could lose.

    While our calculator shows that it can be tough to find a savings account that beats overpaying a mortgage, the same isn't true with investing.

    A top-performing investment will pay substantially more than 10% a year, yet one that performs badly can lose serious amounts of money too. This includes putting cash into your pension or buying more property (possibly as a buy-to-let) rather than paying off your home loan. If it goes well you'll gain, if it goes badly you'll lose. There are no guarantees.

    We don't cover what to invest in as there's no right or wrong answer, only how to buy investments the cheapest way (see Share dealing need-to-knows and Stocks and Shares ISAs) so we won't be taking you much further along this road. If you need help on this, seek independent financial advice.

    However, investing isn't wrong. Done well it's very profitable, provided you understand the risk you're taking.

    But to generate the amount of investment returns equivalent to paying off your mortgage, you'd usually need relatively high-risk investments – overpaying the mortgage gives a surety of return.

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