OVERPAYING ON your mortgage can cut down the time it takes for you to repay the loan, and therefore the amount of interest you pay over the mortgage term. If you are beyond an introductory deal and are paying your lender’s standard variable rate (SVR), you can usually overpay by as much as you want.
Most lenders allow you to pay 10% of your mortgage balance as an overpayment per year without incurring penalties. This is in addition to your normal monthly repayments.
However, the 10% rule is not universal.
Some lenders may penalise those who try to overpay. Early Repayment Charges (ERC) for paying too much can typically range between 1% and 5% of the amount overpaid, depending on your mortgage arrangement. The amount you pay as a penalty will vary between mortgage deals.
WHY SHOULD YOU OVERPAY YOUR MORTGAGE?
Paying off your mortgage sooner will save you money in the long run. The earlier you can clear your mortgage debt, the less interest you will pay overall.
Overpaying your mortgage can also be a sensible move if you think interest rates are likely to rise. By paying off some of your debt now, you will be in a better position to afford higher monthly repayments if rates do go up.
There are several great reasons to make overpayments:
TO REPAY THE LOAN SOONER
Paying off your mortgage sooner will reduce the amount of interest you pay over the term of the loan and releases you from the burden of monthly payments.
TO PAY LESS INTEREST
Overpaying by even a small amount each month can make a big difference to the amount of interest you pay over the term of your mortgage. So, repaying more quickly reduces the total amount you repay, in most situations.
TO MAKE THE BEST USE OF YOUR MONEY
If you have spare cash, overpaying your mortgage can be a good way to use it. The interest you pay on your mortgage is usually higher than the interest you would earn on savings, so you are effectively earning a return by overpaying.
WHEN SHOULD YOU NOT OVERPAY YOUR MORTGAGE?
While paying extra on your mortgage might seem the sensible thing to do, it is important to consider when this is appropriate.
WHILE YOU’RE IN AN INTRODUCTORY PERIOD
If you have a fixed-rate or tracker mortgage, you may be in an introductory period where overpaying could result in an early repayment charge. These can be as high as 5% of your mortgage balance, so it is important to check before you make any overpayments.
IF YOU’VE ALREADY MADE OVERPAYMENTS THIS YEAR
If you have already made the maximum overpayment your lender will allow, you may not be able to make any more until the start of the next year. It can also result in financial penalties, potentially costing you thousands of pounds.
WHEN YOU HAVE HIGHER PRIORITY DEBTS
Where there other debts with higher interest rates, such as credit cards or personal loans, it may be more beneficial to focus on repaying these first.
IF YOU DON’T HAVE ENOUGH SAVINGS
If you don’t have an emergency fund to cover unexpected costs, such as a boiler breakdown or car repairs, it may be better to keep hold of any spare cash you have.
So, if your total savings would cover less than three months’ worth of living costs, it might be more sensible to hold onto them rather than overpay.
HOW DO YOU MAKE OVERPAYMENTS?
Making overpayments is usually a straightforward process. If you have an online account with your mortgage lender, you should be able to make the payment in the same way that you would make your monthly repayment.
If you don’t have an online account, or if you prefer to make the payment over the phone, you can call your lender to arrange this. You will need to give them your mortgage account number and details of the amount you want to pay.
It is worth noting that some lenders may apply a fee for making overpayments, so it is always worth checking before you make the payment.
You’ll also want to check how your interest is calculated, so you can make your overpayment at the right time. Speak to your mortgage broker about your options.
You will find more useful information in our Guide to Early Repayment Charges.
