Should You Overpay Your Mortgage?


Overpaying your mortgage is exactly what it sounds like: making bigger payments on your mortgage each month than your obliged to, or else making one off additional payments when you’re feeling flush. While it may seem like a no-brained that overpayments are a great way to pay off your mortgage early, there’s actually lots of conflicting advice and information out there. So should you do it?

Benefits of overpaying

The biggest benefit of paying off your mortgage quickly is the reduction in interest. Since you pay interest on your mortgage every month, so overpaying will reduce the amount you owe – ultimately bringing down the total cost of owning your own home. You can use the Money Supermarket overpayment calculator to find out how much you could save.

When savings interest rates are low, as they are at the moment, overpaying can be a smarter way to spend your spare cash. That’s because the amount that you’re earning in saving interest is effectively being cancelled out by your mortgage interest payments. As a basic rule of thumb, if you’re paying more in interest than you’re earning on your savings then it makes more sense to prioritise repayments.

Potential downsides

The main downside is the fact that banks will tend to charge an early repayment fee if you overpay by too much too quickly. This is their way of making back some of the money that their losing from your interest payments. There’s usually a threshold that allows you to overpay a certain amount – often 10% – for free, after which you would need to pay a fee. Check your individual terms and conditions to find out how much this is.

Prioritising other debts/emergency fund

There are a couple of things that you should do before you start considering overpayments. The first is to repay any other, more expensive debts such as credit cards or overdrafts. It typically makes more sense to repay these first, not only because they can be expensive, but also because they will get you into trouble if you suddenly find that your income drops and you’re unable to pay.

You should also build up an emergency fund covering 3-6 months’ worth of expenses. Makes sure that this is in an easy access savings account, even if that means you can’t earn much interest. The point of your emergency fund isn’t to make money, but to ensure that you are covered in case of unexpected bills or job loss.

How to overpay

If you’ve considered the factors above and decided that overpayments are right for you, then it’s actually pretty easy to do – you’ll just need to speak to your lender first. If you want to pay more on a regular basis then you should be able to either increase your direct debit or set up an additional standing order. Alternatively, you can make a one-off payment online or over the phone. This is also a good opportunity to ask any outstanding questions you may have and get more information about fees.

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