How mortgage overpayments work
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Overpaying means paying more than your required monthly payment. The extra comes straight off what you owe, so less interest is charged from then on and the mortgage is paid off sooner.
The 10% limit and early repayment charges
Many lenders let you overpay up to 10% a year without a penalty. Go over your limit, or pay the mortgage off early, and you could be charged. The limit usually applies while you are on a fixed or discounted deal. Once you move to the lender's standard variable rate there is often no limit.
On a £200,000 mortgage, 10% is £20,000 a year, or about £1,667 a month. Lenders measure the limit in different ways and some set a lower one, so check your own mortgage offer before you start.
Reducing your term or your monthly payment
An overpayment can be used in one of two ways:
- Your monthly payment stays the same and the mortgage finishes sooner. This is what the calculator above shows.
- Your lender recalculates a lower monthly payment and the mortgage finishes on the original date.
Lenders differ in which one they do by default, so tell yours what you want. Finishing sooner saves more interest. A lower payment saves less interest but frees up money each month.
When overpaying may not make sense
- You have more expensive debts. Credit cards and unsecured loans usually charge more interest than a mortgage.
- You have no savings to fall back on. MoneyHelper suggests keeping enough to cover at least three months before paying your mortgage off early.
- You are not paying into a pension. Tax relief and employer contributions can be worth more than the mortgage interest you would save.
- A savings account pays a higher rate than your mortgage charges.
- You may need the money back. Overpayments usually cannot be withdrawn unless you have a flexible or offset mortgage.
This is general information, not advice on what you should do.
Worked examples
Each example assumes the interest rate stays the same for the whole term and the overpayment is made every month.
£200 a month extra on £200,000 at 4.5% over 25 years
The standard payment is £1,112 a month. Paying £1,312 clears the mortgage in 18 years and 11 months, which is 6 years and 1 month sooner, and saves £36,280 in interest.
£100 a month extra on £150,000 at 5% over 20 years
The standard payment is £990 a month. Paying £1,090 clears it in 17 years and 1 month, which is 2 years and 11 months sooner, and saves £14,256 in interest.
£500 a month extra on £300,000 at 4% over 30 years
The standard payment is £1,432 a month. Paying £1,932 clears it in 18 years and 4 months, which is 11 years and 8 months sooner, and saves £92,414 in interest. The extra £6,000 a year is 2% of the balance, well inside a 10% limit.
Common questions
Is it better to overpay or to save?
It depends on the rates. If a savings account pays more than your mortgage charges, the savings earn more than the overpayment would save, and you can still get at the money.
Will I be charged for overpaying?
Only if you go over the limit in your mortgage deal. Your mortgage offer or annual statement will say what the limit and the charge are.
When is the best time to make an overpayment?
If your lender works out interest daily, the sooner you pay, the sooner you stop being charged interest on that money. If interest is worked out once a year, the timing matters more, so ask your lender.
Can I get an overpayment back?
Usually not. Flexible and offset mortgages are the exception: they let you draw back money you have overpaid.
Where this information comes from
The figures in the examples come from the calculator on this page. The guidance on limits, charges and what to weigh up is from MoneyHelper, the free service run by the government-backed Money and Pensions Service. See should you pay off your mortgage early?