Should I overpay my mortgage?

Mortgage interest is charged on your outstanding balance. Overpay £100 and that £100 stops attracting interest — at 4.5%, that’s £4.50 saved next year, the year after, and every year until the mortgage would have ended. The earlier in the term you overpay, the longer each pound works for you, which is why overpayments in the first ten years do most of the heavy lifting.

There’s a compounding effect too: because your balance falls faster, every subsequent month’s interest charge is smaller, so more of your normal payment goes to capital as well. It snowballs — in your favour.

On a £250,000 mortgage at 4.5% over 25 years (normal payment £1,390 a month):

Notice the shape: £200 a month — about 14% extra on the payment — wipes out more than five years of the mortgage and nearly £40,000 of interest. Run your own balance, rate and term through the Mortgage Overpayment Calculator.

A one-off lump sum works the same way — it just starts working immediately. On the same £250,000 mortgage, a £10,000 lump sum paid today:

• saves about £19,478 in interest over the term — nearly double the £10,000 you paid in; and
• brings mortgage freedom forward by 1 year 9 months.

A bonus, inheritance or maturing savings pot aimed at the mortgage early in the term routinely returns more than it would earn in a savings account — because the mortgage rate is usually higher than savings rates, and the “return” is tax-free.

When you overpay, lenders offer two treatments:

• Keep your payment the same, shorten the term — this is where the big interest savings in the table above come from. Choose this if your goal is paying less overall.
• Recalculate (lower) your monthly payment, same term — this saves far less interest, but gives you breathing room in the monthly budget. Useful if flexibility matters more than total cost.

If your lender asks, “reduce term” (or simply leaving the contractual payment unchanged) is almost always the wealth-maximising answer.

Most fixed and discounted deals let you overpay up to 10% of the outstanding balance per year without penalty. Go over it and an early repayment charge (ERC) applies — typically 1–5% of the excess, often stepping down each year of the deal.

Practical rules:

• On a £250,000 balance, 10% means up to £25,000 a year penalty-free — far more than most people will ever overpay, so the allowance is rarely a real constraint for monthly overpayers.
• Planning a very large lump sum? Time it: split it across two allowance years, or wait until your deal ends (there’s usually no ERC on the lender’s standard variable rate or between deals).
• Check your deal’s exact allowance and ERC schedule — they vary by lender and product.

The core comparison is simple: your mortgage rate vs the after-tax return on savings.

• Mortgage at 4.5%, best savings at 4% (taxable above your personal savings allowance) → overpaying wins.
• Locked into an old 1.5% fix while savings pay 4%+? → saving wins, mathematically: put the money in savings and consider a lump-sum overpayment when the cheap fix ends.

Overpaying is also illiquid — you generally can’t take the money back out without remortgaging or further borrowing. Savings stay accessible. Compare the two paths with the Compound Interest Calculator next to the Overpayment Calculator.

Work down this list before sending extra money to the mortgage:

1. Expensive debt first. Credit cards at 20%+ or overdrafts cost several times your mortgage rate — clear those first (see our Credit Card Repayment Calculator).
2. Emergency fund second. Three months of essential outgoings in accessible savings; the mortgage won’t give the money back in a crisis.
3. Don’t skip free pension money. If your employer matches extra contributions, that’s an instant 100% return — overpaying can’t compete.
4. Then overpay — especially early in the term and when your mortgage rate beats your after-tax savings rate.