A mortgage is the biggest financial expenditure for the average person; they can be beautiful; they can be life-ruining; and they’re often a lifetime commitment. How’s that for striking fear?
Making overpayments on your mortgage is a great way of reducing your mortgage debt earlier than due, which means you toss away less of your money on paying interest! Essentially, it’s a great way of saving a buttload of money!
What is mortgage overpayments?
Making mortgage overpayments is when a borrower pays more than the minimal amount required by the lender. The overpayment can be a one-off chunk and/or setup as a regular payment.
The result of making mortgage overpayments is paying less on interest and paying off your debt early.
So making mortgages overpayments can save you a buttload of money.
Should you make overpayments?
It’s up to you, really!
However, there are a couple of scenarios that come to mind, where it maybe more sensible to make overpayments:
- If you want to pay less interest on your mortgage (obviously)
- If you have money lying around that really isn’t doing much (excluding ’emergency’ funds)
- If your savings rates are lower than the mortgage interest rate you are paying
- If there aren’t any caps or penalties for overpaying (more on this further down)
At the end of the day, it depends on your personal circumstances.
I personally wouldn’t make overpayments if it was going to cause financial stress, but definitely would do if I had money laying around in a low-rate savings account (which is lower than the interest rate of my mortgage), or if I had excess disposal income.
An example of how much money overpaying can save!
The interest rate on my repayment mortgage was 5.59%, on a £155,000 loan amount on a 25yr period. My monthly payment on that was £961.40 per month.
I arranged for a £200 overpayment per month, which meant my monthly mortgage payment increased to £1161.40 per month.
So, how much am I effectively saving? Overpaying saves me £45,012 in interest alone, and it also means my debt is cleared 7 years & 6 months earlier.
Mortgage Overpayment Calculator – find out how much you can save by overpaying!
Almost all mortgage providers will allow you to make mortgage overpayments. However, something to bear in mind is that many lenders cap the amount you can overpay by if you are still within the fixed rate period, usually up to around by to 10%. So you might be limited to how much you can overpay by. If you’re not in your fixed rate period, you probably don’t have a cap.
Lenders have been known to calculate the 10% threshold quite differently from one another. For example, ‘Lender A’ may allow you to make a 10% overpayment based on the overall loan value, while ‘Lender B’ may only allow you to make a 10% overpayment based on the remaining balance (which means the penalty-free limit goes down each year). Some lenders also allow you to carry over the penalty-free allowances to the following year if it’s not used.
Point is, before overpaying your mortgage, check that your lender allows you to overpay it penalty-free, and if there are any limits as to how much you can overpay.
The tool below calculates how much you can save by making overpayments, along with how much time you will be shaving off your mortgage.
Update: Calculator temporarily removed! Be back soon!
Important disclaimer: Please note, this information is computer-generated and relies on certain assumptions (e.g. interest rate will remain the same). It has only been designed to give a useful general indication of costs.
It’s important you always get a specific quote from the lender and double-check the price yourself before acting on the information. We cannot accept responsibility for any errors.
Interest-Only and Repayment Mortgages
You can make overpayments for both repayment and interest-only mortgages, so it doesn’t matter what type of mortgage you currently have.
I’ve explained how making overpayments for repayment mortgages work, by using the example of my current situation. There’s no difference in theory when it comes to making overpayments with interest-only mortgages.
Many borrowers usually get interest-only mortgages because it means monthly payments will be significantly lower. The usual scenario is that a borrower can afford the interest on a property, but no more than that, particularly in this climate.
However, the main issue with interest-only mortgages is that you only pay the interest on the loan, so you don’t actually reduce the mortgage debt; that’s not a very warming thought for a borrower that wants to eventually pay off their mortgage.
If overpayments [to reduce the debt] are made on an interest-only mortgage, the mortgage balance would be reduced per mortgage payment, and eventually the amount of payable interest would lower, meaning lower mortgage payments.
Let me show you a quick example in real terms…
I have a mortgage of £155,000 on a 25yr agreement with a interest rate of 5.59%.
If I was on an interest-only policy, my monthly interest payments would be £722.04.
As mentioned, I’m not reducing my mortgage this way, I’m just paying the interest on the loan.
If I decide I can afford to pay £800 per month, I would be making overpayments of £77.96 per month.
Over a period of time my mortgage balance would reduce, so the amount of interest I pay would reduce.
Repayment mortgages Vs overpaying on an interest-only policy
So yeah, in case some of you are wondering what the difference is between making regular overpayments on an interest-only mortgage and a repayment mortgage, I’d like to throw in my two cents.
There actually isn’t much difference in terms of what they’re both achieving – they’re both means of reducing debt. However, making overpayments on an interest-only mortgage is more flexible, because unlike with a repayment mortgage – where you HAVE to repay some the actual debt each month – making overpayments on an interest-only mortgage is optional.
Extra Notes and recapping on mortgage overpayments
- While overpayments seem like a good idea on paper, it usually always depends on your your own set of circumstances!
- Some mortgage policies cap the amount of overpayments you can make per year without incurring penalties, so contact your lender or read your policy to find out of any restrictions apply to overpayments.
- Some mortgage policies may not allow you to make overpayments at all, or there may be a certain period from when you can start making overpayments. Again, contact your lender or read your policy to determine any restrictions.
- Even the smallest amount of payments can make huge differences in the long run!
- If you’re unsure of your options or you would like further details, ask your mortgage lender or talk to a good mortgage broker. Most local highstreet banks will have their own in-house mortgage advisers which should be able to offer guidance at no cost.
Disclaimer: I'm just a landlord blogger; I'm 100% not qualified to give legal or financial advice. I'm a doofus. Any information I share is my unqualified opinion, and should never be construed as professional legal or financial advice. You should definitely get advice from a qualified professional for any legal or financial matters. For more information, please read my full disclaimer.