7 min read

Is it worth making overpayments on your mortgage?

Andre Spiteri
15 May 2017

Is overpaying your mortgage always worth it? Or are there times when it pays to stick to your agreed repayment schedule?

While overpaying your mortgage can save thousands in interest and take years off the term, it isn’t necessarily right for everyone. Here’s a brief look at the reasons why you’d want to make overpayments, and why it might not be such a good idea.

What is a mortgage overpayment?

Making an overpayment means paying your mortgage provider a larger amount than you’re supposed to pay. You can do this in one of two ways:

1) by making a one-time lump sum payment

2) by adjusting your monthly repayments so that they’re always greater than the specified amount

Why overpay your mortgage?

Making overpayments has three main benefits: it can help you pay off your mortgage sooner, it can drastically lower the amount of interest you have to pay and it can give you increased flexibility.

It’ll take you less time to pay off your mortgage

The extra amount you ‘overpay’ goes entirely towards repaying the mortgage itself, not on any interest you owe. This applies even if you’re on a repayment mortgage. This means you could shorten the amount of time you need to repay the mortgage in full.

You can lower the amount of interest you have to pay

Since overpayments pay down the mortgage itself, you could dramatically cut down the amount of interest you have to pay. The reason for this is because the interest you’re charged is calculated on the outstanding amount you owe. If your outstanding amount is lower, the amount of interest calculated will be lower too.

What monthly mortgage payments cover
More interest is due at the beginning of your mortgage than at the end. This means monthly repayments at the start of a mortgage will be weighted towards paying off the interest rather than paying off the mortgage itself.

As the amount outstanding on your mortgage starts going down, the interest due will gradually go down, too. So, over time, more of your monthly repayment will go towards paying off the mortgage itself.

Greater flexibility

Overpayments put you ahead of schedule by covering the cost of specified repayments for many months. This opens up the option of underpaying down the line.

Not all lenders will allow you to do this, so check first.

When should I overpay?

Depending on your lender, interest on your mortgage may be calculated daily, monthly, quarterly or annually.

If interest is calculated daily or monthly, the timing of your overpayments doesn’t matter. You’ll save money instantly. But if interest is only calculated periodically, you should time your overpayment to coincide with the calculation, or you won’t make any savings.

Example: Your lender calculates interest annually every 21st June. To save on interest in the coming year, you have to make the overpayment before that date.

When NOT to make mortgage overpayments

Overpaying your mortgage can sound like a no brainer. But in reality, whether it makes sense depends on your personal situation. Sometimes, it may be better to stick to the agreed schedule and not overpay at all. Here’s why:

Your lender has restrictions

Not all lenders allow overpayments. In fact, some actively discourage them.

Mortgage lenders make money by charging interest. Overpayments mean less interest, which means your lender makes less money. So, some lenders charge hefty fees to dissuade you.

Restrictions on overpayments
Many high street lenders allow overpayments of up to 10% of the outstanding amount each year during the term of a fixed rate mortgage. Once the term ends and you’re switched to the standard variable rate, many lenders won’t apply any restrictions. However, this is only a guideline. Some lenders charge for overpayments at every stage of the mortgage.

Overpayment fees can be as high as 5% of the overpaid amount. You may find that this cost cancels out or exceeds the benefits of overpaying. Check your mortgage’s terms and conditions carefully and do the maths before you decide.

You have other, more expensive debts

While most of your other debts are probably smaller than your mortgage (well, at least we hope so), they might still be more expensive.

Credit card debts, overdrafts and unsecured loans usually attract higher interest rates than mortgages. It might be best to pay these debts off first, before you consider making any overpayments.

You don’t have anything saved up

While chipping away at your biggest debt is a sensible idea, it’s like putting all your eggs (savings) in one basket.

Unless you sell your house, you won’t be able to get back any of the money you overpay on your mortgage. So you may want to make sure you have enough liquid cash to tide you over in case of emergencies before you commit this to paying off your mortgage.

You may also want to think about retirement (even if it seems a long way off). If the amount of extra cash you have is limited, investing in a pension plan may make more sense than shaving a few years off your mortgage, especially if you’ve got an employer making contributions this as well.

In a nutshell:
  • Overpaying your mortgage can save you a lot of money in interest and pay off your mortgage sooner.

  • Some lenders charge hefty overpayment fees. Check beforehand, as the benefits of overpayment might be outweighed by the costs.

  • Some debts carry higher interest than your mortgage, so they’re more expensive. You may be better settling these first.

  • If you don’t have any money put away and you tend to only have limited extra cash, you may want to prioritise building up your savings before you think about overpaying your mortgage.

by Andre Spiteri

Andre is a former lawyer turned financial writer. Andre has written this article especially for ClearScore.

ClearScore exists to make your finances simple.
We offer a free service where you can handle everything to do with credit in one place. In your ClearScore account, you can see your credit score and the full details of your credit report. Your credit cards, mortgages, mobile phone contracts, loans, overdrafts and utilities all on the record. Our goal is to make ClearScore as simple, calm and straightforward as possible. Money is stressful enough.