How does mortgage overpayment work and when should I do it?

If you have extra cash, paying off the mortgage more may be an easier task. By doing this you could save thousands of pounds over the life of your loan.

Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “If you have the extra funds available to do so, paying more on your mortgage is a great way to reduce the interest you pay. As you pay off the balance early, you end up with a shorter mortgage term, so pay less interest.”

However, paying more is not always the best option. not all mortgage Allow them, and put some limits on how much you can overpay.

Also, your extra cash can earn more or be put to better use elsewhere,

How does mortgage overpayment work?

When you take out a repayment mortgage, your lender will calculate the fixed monthly amount required to ensure that the loan – and all interest – is fully repaid by the end of the term.

If you pay more than this set amount, you are overpaying the mortgage.

Paying more off your mortgage can reduce the total interest you pay and help you pay off your mortgage sooner.

There are two main ways to overpay a mortgage: Lump sum Payment Or regular monthly overpayments.

lump sum overpayment

If you have extra cash – perhaps from savings, a bonus or an inheritance – you can make a lump sum payment to reduce your mortgage balance. For example, if you owe £300,000 and you make a lump sum payment of £50,000, your remaining balance will reduce to £250,000.

When you make a lump sum overpayment, your lender will usually give you two options: you can either reduce your future monthly payments while keeping the mortgage term the same, or keep your monthly payments the same and shorten the mortgage term.

Jonathan Bone, head of mortgages at online broker Better.co.uk, says, “Reducing your payments will mean the total length of your mortgage will remain the same, but your tied payments will be reduced. Alternatively, higher payments that reduce the term will maintain the same monthly payments but reduce the mortgage term.”

“Both options will save you Wealth In the long run, but reducing the duration will do this more effectively. The downside is that your monthly commitment is not reduced.”

monthly overpayment

If you have extra income each month – from a salary increase or income from a tenant, for example – you may choose to pay more than your standard mortgage payment.

For example, if your monthly payment is £1,000, you could increase it to £1,200.

This approach helps you reduce the total term of your mortgage, allowing you to pay it off sooner and reduce the total interest.

How much money can you save?

Paying more off your mortgage can save thousands of pounds over the life of the loan.

For example, if you have a £300,000 repayment mortgage with 20 years left, with an interest rate of 4 per cent, your typical monthly payment would be £1,818.

If you increased your monthly payments by £2,000 (overpayments £182), you would have paid off your mortgage two years and seven months earlier. You’ll also reduce the total amount of interest paid by £19,690.

If you have the same mortgage and you made a lump sum payment of £20,000 more and kept your monthly payments the same, you would reduce your mortgage term by 1 year and 11 months. You will reduce the total amount of interest paid by £22,630.

If you did both of these things – paid £20,000 more in lump sum and then paid £180 more per month – you would reduce your tenure by four years and two months and save £38,180 in interest.

How much more can you pay?

Not all mortgages allow overpayments, so check your mortgage agreement or speak to your lender first. How much more you are allowed to pay – and how much – depends on your specific mortgage product.

For example, your mortgage may allow you to pay up to a set percentage of the original loan each year (usually around 10 per cent) or pay more than a certain amount each month (for example, £500).

“If you have a fixed rate mortgage, there will usually be a limit on the amount you can overpay without penalty,” explains Harris, “Most lenders have a 10 per cent overpayment limit, but some allow 20 per cent and even rarer, some will allow 50 per cent (like Suffolk Building Society). If the borrower repays more than the limit, an early repayment charge is imposed.

If you’re on your lender’s standard variable rate (SVR), you can usually pay more than you want. flexible and repay the mortgage Usually unlimited overpayments are allowed, and many lifetime trackers do so as well.

Should I pay more?

Before overpaying the mortgage, consider whether your money could work harder elsewhere.

Any credit card debt or personal loan will usually be higher interest rates From your mortgage – so pay these off first.

If you don’t have other debt, think about whether your money could be worth more than your mortgage interest in a savings account or in an investment.

Do the math and see what’s best – including whether you’ll need the cash in the future.

When investing, your capital is at risk and you may get back less than you invested. Past performance does not guarantee future results.