Making Overpayments on Your Mortgage

Considering overpaying on your mortgage? Read our guide to find out how it works, whether it’s right for you and why you should speak to a mortgage broker before going ahead.

Home Mortgage Application Making Overpayments On Your Mortgage
Pete Mugleston

Author: Pete Mugleston

Mortgage Advisor, MD

Updated: December 21, 2023

Most mortgages allow you to pay off more than the minimum monthly requirement, but in today’s increasingly volatile market, is this something you should consider?

Here, you’ll learn about the advantages and disadvantages of mortgage overpayments, how to make them (if you’re in a position to), and everything else you need to know about this topic.

Should you overpay on your mortgage right now?

The answer depends on your individual circumstances, but here are some questions to ask yourself to help you understand whether mortgage overpayments are the answer.

  • Are you in a financial position to make overpayments?
  • How much will your lender allow you to overpay by?
  • Might you need that disposable income for something else?
  • Should you pay more or reduce the mortgage term?
  • Should you pay a lump sum or make regular overpayments?

Pondering these questions is a good starting point, but we will explore each of them in detail throughout this guide.

With the current market conditions in mind (high interest rates and rising cost of living), you might be wondering whether making mortgage overpayments is a good idea. Read on to find out how they could help you right now as well as learn about the potential pitfalls you should be aware of before pressing ahead.

Overpayments Calculator

Use our calculator below for an idea as to how much you could be saving if you overpay – whether on monthly payments or with a lump sum – on your mortgage.

Mortgage Overpayments Calculator

This calculator can show you how much you could save and what your new mortgage payments will look like if you were to make overpayments as a lump sum, monthly amount or both.

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Overpayment must be less than outstanding balance

Your current monthly repayment is:

What your mortgage repayments will look like based on your overpayments:

Potential mortgage term reduction:

Amount of interest you could save:

Now that you have a rough idea of how overpayments will affect your mortgage deal, make an enquiry to speak to a broker for bespoke advice about whether this is the right option for you.

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Advantages and disadvantages

Here are the main benefits of mortgage overpayments…

  • You’d pay less in interest overall: This is one of the biggest benefits of mortgage overpayments. By reducing your overall debt, you will pay off your mortgage faster and therefore pay less interest than you would by making the minimum monthly payments.
  • Homeownership: If you’re in a position to keep making overpayments, you’ll achieve full homeownership sooner rather than later. Given that a mortgage is one of the biggest financial commitments you can make, clearing it will remove one of your main outgoings.
  • Your home is a good place to invest in: Since property usually increases in value, putting capital into your home so it becomes equity is often a wise investment. This is especially true when the interest rate on savings accounts and ISAs are on the low side.

Here are the drawbacks to consider…

  • May eat into emergency funds: Any disposable income you have left over each month could be set aside for emergencies if it wasn’t being used to pay extra on your mortgage. Ask yourself whether you can live without this safety net beneath you.
  • Early repayment charges: If you’re locked into the introductory rates period of a mortgage, there could well be early repayment charges (ERCs) if you want to overpay by a specific amount. Be sure to find out if these are applicable and factor them into your calculations before making any big decisions.
  • Mortgages shouldn’t necessarily take priority: Some people with outstanding debts might want to consider settling them before making mortgage overpayments. Rates on loans and other types of finance are often significantly higher than mortgages, so ask yourself whether it makes financial sense to clear other debts before your mortgage

How to make overpayments on your mortgage

Here are the steps to follow…

  • Fact find: You’ll need to find out what your lender’s policy on overpayments is. How much can you overpay by? Will there be any early repayment changes to foot? You will need this information to work out how much you could save overall.
  • Speak to a mortgage broker: This is a recommended step as they can provide professional advice about whether mortgage overpayments are your best option. They can work out how much you’ll potentially save, suggest viable alternatives and help you decide what method you should use to overpay on your mortgage.
    If you’re unable to make overpayments on the terms you want, your mortgage broker could help you remortgage onto a deal with a new lender who fits your requirements.
  • Negotiate with your lender: If you decide that making overpayments is the right choice, you’ll need to speak to your lender to confirm how much you’ll be overpaying by, whether you’ll be extending your term and other details. Your broker will advise you throughout this process and make sure you don’t end up with a deal that isn’t in your best interest.

Make an enquiry with us to get started with a broker we’ve handpicked for you today.

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How much can you overpay by?

This will depend on the type of mortgage you have and whether you’re locked into an introductory rate. Most lenders place a cap on the amount you can overpay during an introductory rates period without penalty, and the typical limit is 10%.

Certain mortgage products, such as some lifetime tracker deals and flexible offset mortgages, come with the option of unlimited, fee-free overpayments.

Those on their mortgage provider’s standard variable rate (SVR) can also make unlimited overpayments in the majority of cases.

Is it better to pay a lump sum or overpay monthly?

It depends on how much that lump sum consists of and how much disposable income you’ll have afterwards, with your new mortgage payments factored in.

Paying off a lump sum can be beneficial when it significantly reduces your mortgage debt. This can result in lower payments going forward and improve your loan-to-value ratio in a short space of time, which might mean you get a better deal when the time comes to remortgage.

Monthly overpayments can have the same effect, but over a shorter period of time. One thing to keep in mind about monthly overpayments is that you can usually opt out of them at any time, so if you find you’re struggling with yours, you should be able to revert back to the original deal.

Finally, you don’t necessarily have to choose between one method and the other. Some lenders will allow you to combine the two and pay a lump sum as well as higher monthly payments.

Term reduction or higher payments?

Whether you choose to make higher mortgage payments over your existing term or shorten your mortgage agreement so the debt is cleared faster, the end result is essentially the same: you get rid of the mortgage debt faster and usually save money in the long run.

However, the big benefit of overpaying is that you can stop at any time if your circumstances change or you simply have a change of heart. If you were to agree a new mortgage term, you will be locked into that agreement for a set period of time; the initial rates period, at least, unless you choose to sever the deal early and likely pay early repayment charges as a result.

Overpaying on an interest-only mortgage

Some lenders will allow you to make monthly overpayments on an interest-only mortgage, but bear in mind that this doesn’t have the same effect as it would on a capital and repayment deal.

Overpayments on an interest-only agreement can reduce the amount of monthly interest you pay or the overall amount, but won’t increase the amount of equity you hold in your home.

Some mortgage lenders may, however, allow you to pay a lump sum off the capital balance of your interest-only mortgage during the term.

Which lenders allow you to pay extra?

Most mortgage lenders allow you to make overpayments to one degree or another, but there can be differences in the cap they place on them and the terms they insist on.

Below you’ll find a snapshot of the overpayments policy across the mortgage market…

  • NatWest: Customers can find out how much they can overpay by logging onto the bank’s self-service platform ‘Manage my mortgage’. Lump sums and higher repayments are permitted.
  • Barclays: Offers a non-refundable overpayments facility and advises customers to log into the online banking or call their local branch to find out how much they can overpay by. Barclays also offers the options of ‘underpayments’ for customers, considered on a case-by-case basis.
  • Halifax: Mortgage holders can overpay by up to 10% of the amount owed at 1st January in that calendar year, without paying an additional fee.
  • Santander: Follow-on Rate, Standard Variable Rate and tracker customers can make unlimited overpayments without penalty. Those on fixed rates can overpay by 10% of their annual balance each calendar year, but can’t carry this allowance over.
  • TSB: Allow borrowers to make one-off lump-sum payments or increase the monthly amount they pay by 10%. Some products come with a higher cap than this.

Speak to a mortgage broker before you decide to overpay

Seeking professional advice from a mortgage broker is recommended before you commit to overpaying on your mortgage. There may be alternatives to consider, such as investing your disposable income or finding a deal elsewhere with a lower interest rate.

The right mortgage broker can talk you through the alternatives and help you understand the full implications of overpaying. If your lender’s policy on overpayments doesn’t fit your needs, your mortgage broker could help you remortgage onto a more suitable agreement.

We offer a free, broker-matching service that will quickly assess your needs and circumstances to pair you with the ideal advisor for you, one with a strong track record of helping people make overpayments without incurring unnecessary fees. Call 0808 189 2301 or make an enquiry and we’ll set up a free, no-obligation chat between you and a broker we’ve handpicked for you today.

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FAQs

Most lenders specify that mortgage overpayments are non-refundable, but there are flexible product types that allow you to borrow back the extra you’ve paid, if you need to.

For example, one high street lender holds overpayments in a reserve account, which some customers can withdraw from if necessary.

The answer very much depends on what you’re investing in. To work this out for yourself, you would need to research the potential returns of your investment and offset the monetary value of them against the amount you will be saving in interest by overpaying on your mortgage.

The typical 10% overpayment limit that most lenders impose is based on the outstanding capital remaining on your mortgage at the time. The amount of interest you pay each month and overall will reduce as a result of paying extra because the percentage due is based on the current debt.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for Online Mortgage Advisor of course!

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Pete Mugleston

Mortgage Advisor, MD

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