Making mortgage overpayments can help you save money in interest and clear your mortgage sooner. But first you should check if there are limits and charges on how much you can overpay and be confident that overpaying your mortgage is right for you.
If you’re considering overpaying on your mortgage, it’s probably because you want to reduce how much interest you pay and ultimately bring forward the day you’re mortgage-free.
But before paying extra on your mortgage, be sure that it’s the best use of the funds available for you. You’ll also want to avoid any charges that your lender might impose for overpaying.
Read on to learn more about the potential benefits of overpaying your mortgage as well as the things you need to be aware of.
Paying off your mortgage early can seem like a smart financial move. After all, the sooner you pay it off the less interest you’ll pay overall. But is putting extra money toward your mortgage really the best use of your funds? There are pros and cons to weigh.
The Potential Benefits of Overpaying Your Mortgage
Here are some of the key benefits you could see by overpaying your mortgage
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You’ll pay less interest overall. When you overpay, more of your payment goes toward the principal loan balance. This reduces the amount of interest that accrues over time
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You’ll be mortgage-free sooner. Overpaying can shave years off your loan term. The more extra you pay each month, the faster you’ll reach payoff.
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Your monthly payments could stay the same. Some lenders let you overpay without adjusting your monthly payment. You’d still pay the same each month but finish sooner.
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You may build equity faster. Overpaying reduces your loan balance, which can boost the equity you have in your home. Having 20% equity or more helps you get better rates if you refinance or qualify for a new mortgage.
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It can be flexible. Many lenders allow lump sum payments, regular extra payments, or both. You can overpay on your schedule.
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Interest rates don’t impact overpayments. Paying extra can make sense even when rates are low. You’ll still reduce interest costs and pay off your balance faster.
The Potential Downsides of Overpaying Your Mortgage
While overpaying has its benefits, consider these drawbacks too:
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You may miss out on better returns. Money you put toward your mortgage could earn more invested elsewhere if you can find higher returns.
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It ties up your funds. Extra mortgage payments can’t easily be undone. You’ll need to refinance to access equity you build through overpaying.
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You lose some tax benefits. Mortgage interest is often tax deductible up to certain limits. Paying off your loan early means fewer interest deductions over time.
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It’s not diversifying your assets. Paying down your mortgage concentrates more of your net worth in your home. Investing elsewhere lets you diversify.
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There could be overpayment penalties. Many mortgages limit how much extra you can prepay annually without fees. Going over the limit triggers charges.
Key Factors to Consider Before Overpaying Your Mortgage
Deciding if overpaying makes sense requires looking at factors like:
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Your loan terms – Does your mortgage allow extra payments? Many do but check for any overpayment limits or penalties.
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Your interest rate – Weigh your rate against rates of return you may get by investing extra funds instead of overpaying.
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Your financial goals – Will overpaying move you closer to specific goals like early retirement or college savings?
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Your budget – Make sure overpaying fits within your budget. Don’t overextend your finances.
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Your emergency fund – It’s smart to have 3-6 months’ worth of living expenses saved before overpaying your mortgage.
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Other savings goals – Make sure you’re on track with retirement, education, and other savings before putting extra cash toward your mortgage.
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Your time horizon – The longer you plan to stay in your home, the more overpaying can make sense.
Tips for Overpaying Your Mortgage Successfully
If you decide overpaying is right for you, keep these tips in mind:
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Ask your lender how to make overpayments properly to avoid issues.
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Make lump sum payments right before your payment due date to reduce interest costs.
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Try to overpay consistently, like monthly, rather than sporadically.
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Specify overpayments should go toward principal only.
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If allowed, divide annual limits across 12 months instead of overpaying quarterly or annually.
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Track your overpayments and resulting savings so you stay motivated.
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Increase overpayments when you get raises or bonuses at work.
The Bottom Line
Overpaying your mortgage can help you become debt-free faster and save on interest. But blindly putting extra toward your mortgage isn’t always the right move. Make sure it aligns with your broader financial goals and situation before deciding if overpaying works for you.
How much can you overpay on your mortgage?
If overpayments are allowed, it’s then important to find out if there’s a limit to how much extra you can pay. Typically you might be allowed to overpay by up to 10% of your total outstanding debt each year, but your mortgage agreement or lender will confirm the amount.
Crucially, if you go above the overpayment limit, you will have to pay an early repayment charge (ERC) – this tends to be somewhere between 1% and 5% of the amount you paid above and beyond the limit.
However, some mortgages, such as tracker mortgages and standard variable rate mortgages, may let you overpay as much as you like without a penalty.
What do you want your overpayments to achieve?
Before you make overpayments, it’s important to tell your lender what your goal is. For example, if you’re looking to shorten your mortgage term on a repayment mortgage, you will want to ask that it keeps your regular monthly payments the same going forward, so you are overpaying.
Otherwise, your lender may reduce your monthly payments in line with the reduced loan amount and your mortgage term will stay the same.
Bear in mind that your lender’s terms and how much you’re looking to overpay might affect what options are open to you.
Should you overpay on your mortgage?
FAQ
Is overpaying on your mortgage worth it?
Overpaying your mortgage can have big benefits, including clearing your repayments sooner and paying less interest. Read our guide to find out more.
Is it a good idea to pay extra on your mortgage?
Paying a little extra towards your mortgage can go a long way. Making your normal monthly payments will pay down, or amortize, your loan. However, if it fits within your budget, paying extra toward your principal can be a great way to lessen the time it takes to repay your loans and the amount of interest you’ll pay.
Is it better to pay off a mortgage or leave a small balance?
They typical answer is that paying down the mortgage is better financially for you, but these are odd times with climbing rates and people with extremely low mortgage rates. You can easily make a small spread with no risk and give you more down payment on your next home compared to just paying down on the home.
Is it smart to overpay for a house?
While overpaying for a house is generally not the ideal investment strategy, it may make sense in a competitive seller’s market or for long-term investors who anticipate significant property appreciation. If you’ve overpaid for a property, there are still ways to turn the investment around.
Is overpaying a mortgage a good idea?
If you have a mortgage, overpaying is a smart move to reduce your total interest costs and accelerate your payoff. It’s important to first compare your mortgage interest rate with current savings and investment rates to determine whether overpaying makes financial sense.
Do you pay interest if you overpay your mortgage?
You don’t pay interest on the amount you overpay. The money you’d save on interest often (but not always) beats the returns possible by putting it in savings. The gains can be worth £10,000s. Here’s a real-life example of someone who’s saved big by overpaying their mortgage: Started making overpayments on my mortgage seven years ago.
Should I overpay my mortgage if my savings rate is higher?
The simple rule of thumb is: KEY RULE: If your mortgage rate is around the same, or higher than your savings rate, then it makes sense to overpay That’s because when it comes to savings, the reverse isn’t automatically true. A higher savings rate could beat overpaying your mortgage, but it won’t always.
What happens if you overpay your mortgage?
Making overpayments can reduce the overall length of your mortgage and give you more mortgage-free years where you can focus on saving for retirement. Read more: Try our mortgage overpayment calculator to see the difference that overpayments could make for you. Will I be charged for overpaying my mortgage?
What does overpaying a mortgage mean?
Making a mortgage overpayment simply means paying more towards your mortgage than you have to under the terms of your home-loan agreement. Your lender will set a minimum amount you must pay back per month, but you’re usually free to go over that level at any time. What are the advantages and disadvantages of overpaying your mortgage?
How much can you overpay a mortgage?
How much you can overpay depends on what sort of deal you have If you’re on a fix or discount mortgage deal. Most lenders allow you to pay 10% of your mortgage balance as an overpayment each year without penalty. If you’re on an SVR (and some trackers). Here you can usually overpay by as much as you want (best to check if you’re on a tracker).