Mortgage overpayments

A quick overview

In this video, we explain how mortgage overpayments work and how making extra payments towards your mortgage could reduce the amount of interest you pay over time. We cover how much you can typically overpay without incurring a fee, the potential benefits of reducing your mortgage balance sooner, and the key things to consider before deciding whether overpaying is right for you.

Transcript

Full transcript of the video:

Did you know you can make extra payments on your mortgage? This is called an overpayment. 

Most lenders allow you to overpay up to 10% of your mortgage balance each year without paying an early repayment charge. 

Choosing to overpay could save you money over the lifetime of your mortgage. 

How does it work?

Let’s imagine you owe £150,000 on your mortgage at the start of the year. Over the year, you could pay an extra £15,000 without paying the lender a fee for repaying early. 

You could make a big payment, smaller payments or a mix of the two.

Why should I do it? 

Regular overpayments could reduce the interest you pay over the lifetime of your mortgage. This could save you thousands in the long term.

So, if your mortgage debt is £150,000 on a 2-year fixed term at 4.9%, and you plan to repay your mortgage in 20 years, your current monthly repayments would be £982.

If you then decide to make a lump sum overpayment of £5000, you could save £7,910 in interest, reduce your mortgage term by 1 year and 1 month and lower the mortgage debt to £145,000.

Overpaying can reduce your loan to value ratio, this could help you get a mortgage with a lower interest rate in the future.

Can I overpay too much? 

If you overpay more than 10% of your mortgage balance you will have to pay an early repayment charge. This is usually 1 - 5% of the amount over the 10% threshold. 

For example, if you owe £150,000 on your mortgage and make an early repayment of £20,000, you would have to pay a percentage of the £5,000 as a charge to the lender.

What to consider before making an overpayment? 

Before choosing to make an overpayment, you should consider your current personal finances and what might change in the short term. 

You may want to consider paying off any other debts beforehand, saving a pot for an emergency or whether you can comfortably afford to make the overpayment.

Even a small regular overpayment could you save you thousands, or tens of thousands, over the lifetime of your mortgage, but first make sure that it’s right for you.

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