How Mortgage Overpayments Work
When you make an overpayment, the extra money reduces your outstanding balance. A smaller balance means less interest accrues the following month, so more of your regular payment goes to capital — a compounding effect that accelerates payoff throughout the term.
Monthly vs Lump Sum
Regular monthly overpayments are most effective because they reduce the balance consistently throughout the term. A lump sum has a bigger immediate impact on the balance, but the total interest saved depends heavily on when it's made. Early overpayments save considerably more than late ones.
Early Repayment Charges
Most UK lenders allow overpayments of up to 10% of the outstanding balance per year without penalty. Exceeding this limit may trigger an Early Repayment Charge (ERC), typically 1–5% of the excess. Always check your mortgage offer documents or contact your lender before making large overpayments.
Frequently Asked Questions
How much can I overpay on my mortgage each year?
Most UK lenders allow you to overpay up to 10% of your outstanding balance per year without an Early Repayment Charge (ERC). Above this limit, your lender may apply a penalty, typically 1–5% of the excess amount. Always check your mortgage terms before making significant overpayments.
Is it better to overpay my mortgage or invest the money?
It depends on your mortgage interest rate versus expected investment returns. If your mortgage rate is 4.5%, an investment would need to reliably return more than 4.5% after tax and charges to beat overpaying. Overpaying is guaranteed and risk-free; investment returns are not. For most people, clearing high-interest debt first is the more conservative approach.
When is the best time to make a lump sum overpayment?
Earlier in the mortgage term is better. Because interest is calculated on the outstanding balance, reducing the balance early means paying less interest over a longer period. A lump sum paid in year 1 saves significantly more than the same amount paid in year 15.
Does overpaying reduce my monthly payment or the term?
This depends on your lender. Most UK lenders will by default reduce your term rather than your monthly payment when you overpay. Some allow you to choose. Reducing the term means you pay less total interest; reducing the payment improves cash flow month to month. This calculator assumes the term is reduced.