A mortgage overpayment is any extra amount you pay on top of your required monthly payment. Overpayments go directly toward reducing your outstanding capital balance, which in turn reduces the interest charged in future months (since interest is calculated on the remaining balance). Over time, regular overpayments can save you thousands of pounds in interest and shorten your mortgage term significantly.
Most mortgage deals allow you to overpay up to 10% of your outstanding balance per year without incurring early repayment charges. If you exceed this threshold, you will typically pay an ERC on the excess amount. Some products, particularly those on the lender’s SVR or certain tracker deals, allow unlimited overpayments with no penalty.
Overpayments can be made as regular additional monthly amounts or as lump sums. Even small regular overpayments can make a substantial difference over the life of a mortgage. It is worth checking your mortgage terms before overpaying, and keeping a record of all overpayments made.
You have a £200,000 repayment mortgage at 4.5% over 25 years. Your required payment is £1,112 per month. If you overpay by £200 per month, you would clear the mortgage in just under 19 years instead of 25, saving approximately £40,000 in interest over the life of the loan.
Key Points
- Overpayments reduce your outstanding balance, saving you interest over the long term
- Most deals allow overpayments up to 10% of the balance per year without penalty
- Exceeding the overpayment limit triggers early repayment charges on the excess
- Even small regular overpayments can shorten your term and save thousands in interest
- Some products (SVR, certain trackers) allow unlimited overpayments with no ERC