Should I overpay my mortgage?

Want to pay your mortgage off faster? Mortgage overpayments could be for you.

Mortgage overpayments are when you pay more than your normal monthly mortgage payment. This means you can pay your mortgage off faster, and you end up paying less interest overall.

We'll weigh up the pros and cons on overpaying your mortgage to help you decide if it's the right option for you.

Is it worth overpaying my mortgage?

Deciding whether to overpay your mortgage is worth it largely depends on your personal situation and what your goal is.

If you’re looking to pay your mortgage off faster, then making overpayments is a flexible way to do this. Most lenders have a limit on how much you can overpay before you face fees. Based on this, you can choose how much and how often you overpay. You can then go back to your regular payments at any time, depending on the lender.

You might also want to consider overpaying if your mortgage interest rate is higher than your savings interest rate.

For example, let's say you’ve got a savings account with 1% interest and you saved £5,000, the annual interest earned on that would be £50. At the same time say you’ve got a mortgage debt of £5,000 in with 3% interest, the extra you’d pay in interest on top of that debt would be £82.

In this case, you'd make a bigger saving by overpaying your mortgage and not having to pay the interest than you would from the interest you'd get from your savings account.

But if you could get a savings account with a higher rate than your mortgage, instead it might be worth putting your extra cash into savings. Also remember that if you overpay your mortgage, you can't get the cash back, but depending on the savings account you opt for, you might be able to withdraw funds easily.

But first, do your research and speak to your lender to check their rules around mortgage overpayments.

Pros and cons of overpaying my mortgage

Pros:

• Reduce your debt - overpaying means you're closer to owning your home entirely and so increasing your equity.
• Save money - by reducing the amount of interest you pay overtime.
• Lower your loan to value (LTV) - a lower LTV means when you remortgage you could have access to better rates.

Cons:

• Early Repayment Charges (ERCs) - most lenders let you overpay up to 10% of your loan each year, if you go above that you could be fined.
• Less available cash for emergencies - there's a risk that you won't get your money back if you suddenly face financial hardship, like losing your job.

How much can I overpay my mortgage?

Typically, most lenders have a fee-free overpayment limit of 10% of what's left on your loan per year. But the amount varies, so check the policy with your lender.

Going above the lender's limit means you could be charged additional fees. Your early repayment charge (ERC) is usually 1-5% of the outstanding mortgage. But for some mortgages your ERC percentage goes down the longer you've been on your mortgage deal.

So be aware that if you choose to overpay more than the fee-free limit you lender's set, you could part with much more cash than you expected.

Is it better to overpay my mortgage monthly or with a lump sum?

Ultimately it's down to your personal preferences.

If you make smaller, monthly overpayments, it can be easier to budget for as it's predictable. It also allows more flexibility.

For example, let's say you have an expensive few months coming up, like the lead up to Christmas. You can always choose to stop the overpayments and go back to your regular monthly repayments.

If you decide to pay a large, lump sum of your mortgage you may end up saving more on the interest. You might also pay your mortgage off sooner if you frequently do this over the course of a few years.

But this option is not without risks. If you overpay a large amount and later decide you need the money for emergencies, it can be difficult to get back.

Things to consider before making mortgage overpayments

Do you currently have a good mortgage deal?

There's been a recent rise in the Bank of England base rate where we're seeing the average 2-year fixed rate mortgage at a 75% LTV of 6.55%*.

So if you already have a fixed-rate mortgage rate well below this average, it could be worth taking advantage and overpaying your mortgage if you can afford to.

*This is just an example of the rates in the current mortgage market at the time of writing. These rates may not be available when you submit a mortgage application with our mortgage broker, Mojo Mortgages.

Have you got a pension?

If you have enough money to overpay your mortgage, but you haven't got a pension, you should probably prioritise the latter.

Pensions are a long-term investment and a state pension won't be enough to keep you going during retirement. Unfortunately with inflation, the cost of retiring comfortably has risen by 18% in the past year.

Some people also choose to use the value of their home to supplement their retirement income. You can do this by:

• Downsizing to a cheaper property
• Renting out a spare room
• Equity release mortgages

Do you have savings in case of emergencies?

It's important to always have emergency cash on hand should you need it.

Once you overpay your mortgage, it might be difficult to get your money back. In some cases, the only way you can access the money back is if you remortgage and release the equity.

But this doesn't apply if you have a flexible mortgage, like offset mortgages, as they give you the option to borrow back the money you've paid off at any time.

Have you paid off all your debts?

This one might seem obvious, but if you've got enough cash to spend you're better off paying high-interest debts like your credit card or loans.

Paying off your debts means you'll improve your credit score, so in the longer-run you could get access to better mortgage rates.

How to overpay my mortgage

If you've considered all your options and decide a mortgage overpayment is right for you, there are a few ways you can do this:

• Change your mortgage payments online with your mortgage lender to arrange more money to be taken out of your direct debit.
• Set up a separate standing order of the mortgage overpayment to your mortgage account.
• Transfer the money as and when on your online banking app.

But before you overpay on your mortgage, make sure you've talked to your lender first.