Why overpaying saves so much
Mortgage interest is charged on the balance you still owe. Every extra pound you pay goes straight off that balance, so you stop paying interest on it for the rest of the mortgage. Your regular payment then clears the balance sooner, because more of each payment goes to the loan and less to interest.
Take a £200,000 repayment mortgage at 4.5% over 25 years. The monthly payment is £1,111.66, and over the full term you would pay £133,499 in interest: two-thirds of the amount borrowed. Overpaying cuts into that interest bill directly.
A guaranteed, tax-free return
Each pound you overpay saves interest at your mortgage rate. Unlike savings interest, that saving is not taxed, and unlike investments, it is certain.
Regular monthly overpayments
Here is what different monthly overpayments do to a £200,000 mortgage at 4.5% with 25 years left:
| Extra each month | Interest saved | Mortgage-free sooner by | Total overpaid |
|---|---|---|---|
| £50 | £11,534 | 1 year 10 months | £13,850 |
| £100 | £21,142 | 3 years 6 months | £25,700 |
| £200 | £36,280 | 6 years 1 month | £45,200 |
| £300 | £47,708 | 8 years 1 month | £60,600 |
| £500 | £63,887 | 11 years | £83,500 |
| £1,000 | £85,961 | 15 years 2 months | £117,000 |
With £200 a month extra, you would clear the mortgage in about 19 years instead of 25. You would overpay £45,200 in total and save £36,280 of interest, so every £1 overpaid saves about 80p.
Lump sums
A one-off payment, such as a bonus, inheritance or savings, reduces the balance at once. A £10,000 lump sum on the same £200,000 mortgage saves £19,300 in interest and finishes the mortgage 2 years 2 months early.
A yearly lump sum works like a monthly overpayment paid less often. Paying £2,000 at the start of each year from the second year saves £30,433 and clears the mortgage 5 years 1 month early.
- Interest without the lump sum£133,499
- Interest with the lump sum£114,199
Why earlier is better
The longer the money stays off your balance, the more interest it saves. A pound overpaid with 25 years to go saves interest for 25 years; the same pound overpaid with 5 years to go saves interest for 5.
| After | Without overpaying | With £200 a month | Difference |
|---|---|---|---|
| 5 years | £175,716 | £162,287 | £13,429 |
| 10 years | £145,317 | £115,077 | £30,240 |
Early in a mortgage, most of each payment is interest. That is exactly when overpaying has the biggest effect, and when it most quickly improves your loan-to-value for your next remortgage.
Shorter term or lower payment
When you overpay, your lender either keeps your payment the same and shortens the term, or keeps the term and lowers your payment. Many recalculate the payment by default.
- Payment
- Stays the same
- End date
- Earlier
- £200 a month saves
- £36,280
- Best for
- Saving the most interest
- Payment
- Falls a little each time
- End date
- Unchanged
- £200 a month saves
- £18,998
- Best for
- More room in your budget
If you want the biggest saving, ask your lender to reduce the term, or keep paying your original amount after they recalculate.
How the rate changes the saving
The higher your rate, the more each overpayment saves. £200 a month on a £200,000, 25-year mortgage saves:
| Mortgage rate | Monthly payment | Interest saved |
|---|---|---|
| 3% | £948 | £21,622 |
| 4% | £1,056 | £31,067 |
| 4.5% | £1,112 | £36,280 |
| 5% | £1,169 | £41,843 |
| 6% | £1,289 | £54,078 |
Allowances and early repayment charges
Most fixed-rate and discounted deals let you overpay up to 10% of the balance each year without a charge. Above that, an early repayment charge (ERC) applies to the excess, often 1% to 5% depending on how long the deal has left.
- Check whether the allowance runs per calendar year or per year of the deal.
- Some lenders work out 10% of the balance at the start of the year, others of the original loan.
- Regular overpayments and lump sums usually share the same allowance.
- Tracker and standard variable rate mortgages often have no limit at all.
Check before a big lump sum
On a £200,000 balance, 10% is £20,000. A £30,000 payment would put £10,000 over the limit, and a 3% charge on that would cost £300.
Overpay or save?
Overpaying saves interest at your mortgage rate, with no tax. Savings earn interest that may be taxed. To compare them fairly, convert your mortgage rate into the savings rate you would need before tax.
| Tax on your savings interest | Savings rate needed |
|---|---|
| None (ISA or within allowance) | 4.5% |
| 20% (basic rate) | 5.63% |
| 40% (higher rate) | 7.5% |
| 45% (additional rate) | 8.18% |
The Personal Savings Allowance lets basic-rate taxpayers earn £1,000 of interest tax-free a year, and higher-rate taxpayers £500. ISAs are tax-free entirely. So for many people the fair comparison is simply the mortgage rate against the best tax-free savings rate.
Savings have one big advantage: you can get the money back. Once you overpay a mortgage, getting it back usually means borrowing again.
Overpay or invest in a pension?
Pension contributions get tax relief, and many employers match extra contributions. A higher-rate taxpayer pays only 60p for each £1 that goes into their pension. That head start is hard for mortgage overpayments to beat, though pensions are invested, can fall in value, and cannot be touched until at least age 55 (57 from 2028).
Many people split the difference: take the full employer match first, then overpay the mortgage with what is left.
How to overpay
- 1Check your deal
Find the allowance and any early repayment charges in your mortgage offer or online account.
- 2Choose term or payment
Tell your lender whether you want a shorter term or a lower payment.
- 3Set it up
Increase your direct debit, set up a standing order, or make a one-off card or bank payment.
- 4Track it
Keep a running total so you stay within the yearly allowance.
Overpaying and remortgaging
Overpaying lowers your balance, which lowers your loan-to-value. Crossing a band, such as from 76% to 75%, can unlock a cheaper rate on your next deal. When your fix ends, you can usually pay off any amount without a charge, so it is a good moment to put a lump sum in.
When not to overpay
- If you have more expensive debts, such as credit cards or car finance, pay those first.
- If you have no emergency fund. Aim for three to six months of spending in easy-access savings.
- If you would lose an employer pension match.
- If the overpayment would trigger an early repayment charge larger than the interest saved.
- If you might need the money soon, for example for a move, a car or a baby.
Some lenders offer flexible mortgages that let you borrow back overpayments, and offset mortgages that reduce interest using your savings while keeping them accessible.
Bigger mortgages, bigger savings
The larger the balance and the longer the term, the more interest each overpayment avoids. £200 a month extra on a £300,000 mortgage at 4.5% over 30 years saves £59,436 of interest and clears the mortgage 6 years 4 months early.
Near the end of a mortgage the effect is smaller. With £120,000 left over 15 years at 4.5%, the same £200 a month saves £11,409 and finishes 3 years 6 months early, because there are fewer years of interest left to save.
Yearly lump or monthly?
If you can, paying a year's overpayments up front saves slightly more than spreading them out. On the £200,000 mortgage, £2,400 paid at the start of each year saves £38,031 and finishes 6 years 3 months early, compared with £36,280 and 6 years 1 month for £200 a month. The difference comes from the money being off the balance for longer.
In practice, a monthly standing order is easier to stick to. The best plan is the one you will keep up.
When your fix ends
The end of a fixed deal is often the best time to make a large overpayment, because early repayment charges no longer apply. On the £200,000 mortgage, after 5 years the balance would be about £175,716. Paying £10,000 off at that point, with 20 years left, saves £13,634 of interest and 1 year 9 months.
Paying down before you remortgage can also move you into a lower loan-to-value band, so the new deal may be cheaper too. If you are moving to a new lender, ask your current lender how to make the payment before the switch.
Offset and flexible mortgages
An offset mortgage links your savings to your mortgage. You pay interest only on the balance minus your savings, but the savings stay yours to withdraw. It is a way to get most of the benefit of overpaying without giving up access to the money. Offset rates are often a little higher than standard deals.
A flexible mortgage lets you overpay and later borrow the overpayments back, or take a payment holiday. Check the terms: the lender may need to approve any drawdown.
Overpay or invest in an ISA?
A stocks and shares ISA has historically returned more than mortgage rates over long periods, but with no guarantee: investments can fall, sometimes sharply, and you might need the money at a bad time. Overpaying gives a certain, tax-free return equal to your mortgage rate.
A common approach is to do both: build an emergency fund first, take any employer pension match, then split spare money between overpaying and investing. The higher your mortgage rate, the stronger the case for overpaying.
Mortgage-free by retirement
Many people extend their term to keep payments affordable, then find the mortgage runs past their planned retirement. Lenders check whether you can afford payments after you retire, and an income drop with a mortgage still running can be a strain.
Overpaying is a straightforward way to bring the end date forward. Use the calculator to find the monthly overpayment that ends your mortgage by a chosen age: increase the extra payment until the "mortgage-free in" figure fits your plans. Some people also plan to use part of their pension tax-free lump sum to clear what is left. That can work, but it reduces your retirement income, so take advice before relying on it.