Do I overpay for mortgage? – Forbes Advisor UK

When you take out a repayment mortgage (principal and interest), your lender will determine how much you have to repay each month to ensure that the mortgage is paid off at the end of the agreed term.

If you pay more than this amount, you will be making a “mortgage overpayment”.

Note that if you have an interest-only mortgage, you write off what you owe all at once at the end of the mortgage term.

Making mortgage overpayments means you’ll pay off your mortgage faster and save money on the full amount of interest you pay over the life of the mortgage.

But that doesn’t mean mortgage overpayments are good for everyone. First, not all mortgage agreements allow overpayments, and some place a limit on how much you can overpay. Second, any cash you have could be better spent elsewhere.

So here’s a rundown of mortgage overpayments so you can determine what’s best for you.

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How do mortgage overpayments work?

Mortgage overpayments mean paying more than your monthly contractual payment.

There are two ways to make mortgage overpayments:

  • ad hoc / occasional packages
  • regular monthly overpayments.

Lump-sum mortgage overpayments

If you have some cash on hand or are receiving an annual premium, you may want to pay a lump sum on your mortgage.

For example, if you owe £ 200,000 on your mortgage and pay a lump sum of £ 50,000 then you will owe £ 150,000 on your mortgage.

When you make the overpayment, your lender may offer you two options:

  • reduce future regular monthly payments and keep the same mortgage term
  • by keeping the same monthly payments and reducing the term of your mortgage.

It’s almost always better to keep the same monthly payments and reduce the term of your mortgage. This will allow you to pay off your mortgage debt sooner than you expect.

Monthly overpayments

If you have excess disposable income each month, you may want to pay too much by increasing your regular mortgage payments.

For example, if your monthly mortgage payment is £ 500, you might want to pay £ 600 instead.

This means you’re reducing the term of your mortgage – in addition to paying it off faster, it means you’ll pay less interest overall.

How much can you overpay?

Not all mortgages allow overpayments – so check your mortgage contract or talk to your lender before doing anything.

Whether you can overpay and by how much will depend on your mortgage product (not just your lender), as different mortgage products have different overpayment rules.

Your mortgage can allow you to:

  • make unlimited overpayments
  • overpay a percentage of the original loan amount each year (usually 10%)
  • overpaying a sum of money each month (e.g. £ 500)
  • don’t overpay at all.

If you have a “flexible” or “compensatory” mortgage, you can normally make unlimited overpayments. Lifetime trackers often also allow unlimited overpayments.

If you pay your lender’s Standard Variable Rate (SVR), you can usually overpay as much as you want.

Your ability to overpay will likely be more limited on a fixed rate mortgage. If you pay too much, an early redemption charge (ERC) may apply and wipe out some of the savings you’re trying to achieve.

How much money can you save by overpaying?

You can save a lot of money by overpaying your mortgage. Here are a few examples, with all figures rounded to the nearest pound.

Suppose you have a £ 200,000 repayment mortgage with 20 years remaining with an interest rate of 3%. Your normal monthly payment would be £ 1,109.

If you increase that amount from £ 100 to £ 1,209, you reduce the term of the mortgage to 17 years and 10 months, and thus pay it back two years and two months faster. You also reduce the total amount of interest you paid from £ 66,206 to £ 58,403, saving £ 7,803.

If you had the same mortgage and paid a lump sum overpayment of £ 20,000 and kept your monthly payments the same, you would cut your mortgage term by two years and seven months.

You also reduce the total amount of interest you pay from £ 66,206 to £ 51,165, saving £ 15,041.

If you did both of these things – make a lump sum payment of £ 20,000 and overpay £ 100 per month – you cut your term by four years and five months and save £ 20,797 in interest.

How can you start (or stop) paying too much?

It’s usually best to call your lender to discuss any overpayments you plan to make. This will allow you to check the limits or charges.

The lump sum overpayment can normally be made by bank transfer. If you have online banking services, some lenders will allow you to change your mortgage payment online.

You might also be able to set up your mortgage account as a payee on your online banking so that you can make overpayments as and when you want.

What are the benefits of overpaying your mortgage?

As noted above, making mortgage overpayments means you can pay off your mortgage faster and pay less interest overall.

It will also increase the equity in your property. This means that you will have a lower loan-to-value ratio (LTV), which will make you eligible for cheaper mortgage products if you want to remortgage.

With interest rates on savings so low, most people will pay more interest on their mortgage than they earn on their savings. This means that it makes financial sense to pay too much.

What are the disadvantages of paying too much for a mortgage?

Not all mortgage products allow overpayments. So check your contract before you start making additional payments. If you purchased a fixed rate mortgage with a prepayment charge, a large overpayment could result in the charge being levied.

You should only overpay on your mortgage if you have enough money to do so. Before you overpay, make sure that you can still afford your monthly expenses and that you have enough cash for any emergency.

Mortgages have lower interest rates than many other types of debt like credit cards and loans. So if you have some cash on hand, you need to pay off your most expensive debts first.

Can you recover your overpayments?

When you pay off your mortgage overpayment, you may want to have the option of paying your money back or making underpayments in the future.

If your mortgage is fully flexible, or if it is a compensatory mortgage, you should be able to borrow the amount you overpaid, or perhaps underpay within certain limits.

But with most other mortgage products, you might not be able to get back the money you overpaid. So, keep this in mind before you overpay.

Free mortgage advice

Trussle is a 5-star Trustpilot-rated online mortgage advisor who can help you find the right mortgage – and do all the hard work with the lender to secure it. * Your home can be repossessed if you default on your mortgage payments.