What to think about before overpaying your mortgage
Monzo makes it easy to track your mortgage from your lender. You’ll also get insights on what you could do with spare money, like making overpayments that could help you pay less interest.
Before you make any overpayments, here’s some useful information about what they are and how they could save you some money.
If you own your home or are saving for a deposit, you might have noticed interest rates at record lows in the past. Since 2022, they’ve increased considerably, making it more expensive to buy a home or remortgage when your current deal has come to an end. For some people, this now means that overpaying on your mortgage could be a good option and save thousands of pounds in interest and see you mortgage free faster.
What does overpaying mean?
Overpaying (in the mortgage context) simply means you make additional payments on your mortgage compared to what you’ve agreed with your mortgage lender. This could be regular overpayments every month alongside your normal payment or a larger lump sum payment if you’ve got some additional savings (like from a bonus or inheritance). It can save surprising amounts of money in the long run because unlike your regular mortgage payment, it can go entirely to reducing your mortgage debt (rather than a portion going towards interest).
You’ll normally want to make sure that any overpayments go towards reducing your total debt, rather than your future monthly payments. You can normally find this in your mortgage offer or your lender should be able to help you get this set up.
We’ve calculated an example based on a £171,000 mortgage with 2.28% interest rate borrowed over 26 years. If you overpaid by £50 each month:
You’d be mortgage free 2 years, 2 months faster and save £5,100 in interest.
If you you had a higher interest rate, say 4.50%, then a £50 regular overpayment would mean:
You’d be mortgage free 2 years, 4 months faster and save £12,300 in interest.
This assumes a number of things including that you’d pay no ‘early repayment charges’ and your interest rate stayed the same until you paid it off.
A quick explainer on ‘Early Repayment Charges’
You might decide that overpayments are worth exploring, however many mortgages have a limit on your “free” overpayments before you might have to pay what’s known as an Early Repayment Charge (ERC). This is an additional fee, normally 0.5%-5% of the amount you overpaid, charged by the mortgage lender for overpayments above their overpayment limit.
For many people, this won’t be an issue (but do your homework) as most mortgage products commonly allow a total additional overpayment of 10% of your mortgage balance in a 12-month period. For a £200,000 mortgage this would mean you could make extra payments of £20,000 on top of what you would pay normally. Check with your lender if you’re not sure.
Why overpaying might be right for you
You’ve got money spare (either in your monthly budget or as a lump sum) that you’d like to do something with.
You’d prefer to lock your money away so that you’re not tempted to use it for something else.
If your mortgage rate is higher than what you’d be able to earn on savings (people with high savings might also pay tax on savings interest which can reduce your effective savings interest rate further). A small difference in interest rates can have a big difference over the life of a long commitment like a mortgage.
You’ve got a goal of being mortgage free sooner.
Why overpaying might not be right for you
Your mortgage interest rate is less than what you can earn in a savings account.
You've got other debts that you pay higher interest rates on (like personal loans or credit cards you don’t pay off in full).
You’ve not built up an emergency fund or savings safety net - check out our safety net for more help on this.
You think you'll need the money back before you next remortgage or sell your property – it isn’t always possible to take overpayments back out or “underpay”.
How do you make overpayments?
Every lender handles this a bit differently. Most of the larger banks and building societies will allow you to make overpayments either by:
Amending your Direct Debit – your overpayment will come out with your monthly payment.
Creating a standing order – best suited to a lump sum overpayment or if you want more control to change your regular payment each month.
Make sure to check whether your overpayment is set to reduce your mortgage balance and what your lender’s policy is on overpayment limits, as well as what early repayment charges might apply.
Want to explore overpayments further?
If you’ve connected your Mortgage to Monzo, why not try our overpayments calculator? You can find the 'Try overpayment calculator' within the mortgage section of your app. You can see the personalised impact of overpayments on your mortgage, whether that's a small regular overpayment or a one-off payment.
