Introduction
One of the hardest decisions in the world of personal finance is taking the step of getting a mortgage. A mortgage is a scary thing, but it doesn’t have to be. In this guide, I will go through the decision process surrounding whether you should overpay for a mortgage, the impact of overpaying a mortgage and give a few case scenarios for if you should overpay your mortgage.
A mortgage sounds very complicated, but it is essentially just a loan where you agree a term (how long it will take you to repay) and an interest rate. It’s not so disimilar to getting a loan to buy a car or to get a new boiler, just on a much bigger scale (I really hope you are not getting a loan for a few hundred thousand). In return for borrowing you the money, the lender will earn interest and if you fail to repay your mortgage then the lender gets your house. For this reason, lots of people try and repay their mortgage as fast as possible to give them peace of mind and save thousands, potentially tens of thousands! A survey of the British public found that 40% of people would choose to pay off their mortgage first if they won the lottery https://www.olbg.com/blogs/what-do-brits-do-after-big-win.
What even is an overpayment?
When you take out a mortgage, your total loan amount is broken down over a set time frame and then charged an interest rate. Below there is a table showing you how this works in reality for a mortgage. If your monthly payment is £1000 and you overpay £100 a month then your yearly mortgage cost would be £12,000 without the overpayment and with the overpayment it would be £13,200. You will notice that overpaying has essentially added just over 1 extra monthly payment, as if there was 13 months in a year. If you do this for 12 years you have essentially cut a year off the mortgage. It is essential that before you make your first overpayment you ring the bank and state that you want any overpayments to go towards the principle NOT adjsuting your monthly payment.
Why bother to overpay my mortgage?
During the current cost of living crisis it can seem outrageous to just throw money at the bank. In a recent Financial Times article, 49% of mortgaged home owners report feeling worried about their ability to pay their mortgage https://www.ftadviser.com/mortgages/2023/11/09/cost-of-living-crisis-has-significant-impact-on-homeownership-ambitions/ but overpayments are actually pulling money out of the banks pocket. When you overpay, you overpay on the principle (the money you actually borrowed) and you only pay interest on what you borrow, not the actual value of the house. This is kind of similiar to how if you pay off your credit card in full every month you dont pay interest, even though you borrowed money. The interest is only due when the payment period for that agreed upon monthly amount ends. If I lend you 5 apples to repay me in 7 days time for an extra 2 apples in interest, if you pay me back in 5 days then you don’t have to give me the 2 extra apples. This is how overpayments work, just with money, not apples.
Examples of overpayments
The below graph is to demonstrate the power of overpayments. One of the biggest benefits of overpaying a mortgage is that it cuts down the repayment time frame. Overpaying £1000 a month cuts your mortage in more than half!
amount borrowed (5% interest) | Monthly Payment (25 years) | Overpayment | Amount saved |
|---|---|---|---|
£250,000 | £1000 | £0 | £0. total cost £300,500 |
£250,000 | £1000 | £100 | £5660. Total cost £294,270 |
£250,000 | £1000 | £250 | £12,080. Total cost £287,850 |
£250,000 | £1000 | £500 | £19,420. Total cost £280,500 |
£250,000 | £1000 | £750 | £24,370. Total cost £275,560 |
£250,000 | £1000 | £1000 | £27,920. Total cost £272,000 |
Potential issues with overpaying
Many mortgages cap overpayments. The bankers wont let you win entirely on this one unfortunately. Most lenders cap mortgage overpayments at 10% of the remaining loan value. If we take the above example, in your first year you could repay £25,000 (10% of £250,000) but in your second year you need to take away that 10% overpayment AND the monthly payments you have made. £25,000 + £12,000 = £37,000 then do £225,000 – £37,000 = £188,000 so your next years repayment would be capped at £18,800. It is possible to break the cap, you just have to pay a fee, usually 1% of the overpayment amount. There are scenarios where it is better to pay the fee but in most cases you will want to stay below it.
Why should I not overpay?
Overpaying is very rewarding and can save you tens of thousands over the life of a mortgage but it can also cost you even more. If you have thousands of £’s in credit card debt charging you 35% interest a month then you will lose any overpayment benefit very quickly and you could even end up defaulting, putting your house ownership at risk. Another case could be where your mortgage rate is so low that its highly likely that you would earn more money by investing the money in a well balanced stock portfolio rather than shortening your mortgage. Not so many years ago, mortgage rates comfortably sat at around 2% whilst you could earn 7% investing in the S&P500. Unfortunately, in 2025 mortgage rates have risen drastically, making the difference rarely more than a couple of percentage points. Many people also prefer the security of knowing their mortgage is paid off and will pay a “premium” for that security.
In summary, overpaying a mortgage can be massively beneficial and save you thousands in the long run and also allowing you to feel secure in your home knowing it cannot be repossed for missing mortgage payments. Have a look at your own financial situation, run your budget and work out if it is something you wish to do for your financial future.