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Can Overpaying Your Mortgage Save You Money?

Thu 19 May 2016

Have you made a resolution to tackle your mortgage in 2016? Do you have any disposable income that could be offset against your mortgage?

If the answer to either of those questions is yes, you may be considering overpaying your mortgage. But is it the right decision for your circumstances? Here, the Money Advice Service sets out some rules of thumb to help you decide.

When overpaying your mortgage could be the right choice

By overpaying on your mortgage, you could potentially make big savings on your interest and cut years from your mortgage term.

So, for example, if you have a repayment mortgage of £150,000 that you’re paying back over 25 years with 4.75% interest, your current monthly mortgage payments would be £855.17.

However, paying an extra £150 a month would cut your mortgage from 25 years to 18 years and 10 months. You’d have reduced your mortgage term by six years and two months and you’d have saved more than £29,000 in interest payments, which could be a great use of any spare money.

The first thing you should do is complete a budget and work out your outgoings and income to see if you could afford making additional payments or a lump sum payment against your mortgage.

Then you should speak to your lender.

If your mortgage interest is charged daily, then the sooner you make the overpayment the better. However, if it’s charged annually, then you need to time your overpayment so that it counts towards the calculation of the interest for the year.

Some mortgage deals also have a limit on the amount you can overpay – make sure you find out first, or you could have to pay a penalty charge.

Overpaying your mortgage infographic

Do you owe money elsewhere?

There are some circumstances in which any extra money could be better spent elsewhere or put aside for other expenses or an emergency fund. Most importantly, you should consider other debts first. So, if you owe money on a credit or store card or if you have a personal loan, you should think about paying them off before making any extra payments on your mortgage.

That’s because you’ll pay a lower rate of interest on your mortgage than on these other types of debt.

Having some rainy day money is also a good habit to get into – try to save enough to live on for three months if you can.

Take a look at our video for a two-minute digest of your mortgage overpayment options.



Will interest rate rises affect your mortgage?

Interest rates – the charge on borrowing money – look set to rise at some stage.

If you have a variable rate mortgage, you should find out what effect this could have on your monthly payments and set aside some money in case interest rates do go up.

For example, if you’re repaying a mortgage at 3% APR (Annual Percentage Rate) variable, would you still be able to keep up with repayments if your lender changes the rate to 6% APR?

If not, another option would be to consider a fixed rate mortgage deal.

The above information can be found on

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