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Mortgage Overpayments: Explained
A mortgage overpayment means when you pay an amount which is more than your usual mortgage payment. It can be done in 2 ways. You could either over pay on your monthly mortgage instalment, or you could overpay in a single lump sum.
An example of a monthly overpayment is when you pay £800 instead of your usual monthly payment of £700. This is an overpayment of £100.
An example of a one-off payment is when you make a single payment of £2000, besides your usual monthly payment.
The overpayments are always made towards the capital. This has the advantage of reducing your interest amount, as the interest is charged on the capital, so If thew capital goes down, so does the corresponding interest.
Most lenders cap overpayments to around 10% per year. It is wise to find out what your lender’s cap is and stay within your permitted amount, otherwise the lender may charge you an Early Repayment Charge (ERC).
Why should I overpay my mortgage?
Most people decide to overpay their mortgage so that they can pay of the loan sooner rather than later, freeing them from financial commitment of the mortgage.
Overpaying also saves you quite a bit of money in interest. This is because when you make the overpayments, you make them towards your loan capital. A reduced loan means less interest to pay, which means that much money in your pocket.
Putting your extra money towards your overpayments is also a smart move if your mortgage interest rate is higher that savings interest rate. If you earn less interest on savings, it is better to overpay your mortgage because you save yourself from paying an interest at a higher rate.
Does overpaying my mortgage reduce the term?
Making overpayments will not necessarily reduce your mortgage term, so if you want to pay off your mortgage quicker, you will need to get in touch with your lender to discuss a new shorter term.
However, making overpayments gives you more freedom than shortening your term and this is how: If you shorten your mortgage term, your monthly mortgage payments will automatically rise and you will be legally bound to make these payments. This might have a considerable effect on your monthly budget. On the other hand, if you don’t opt for shortening your term but make overpayments, you can make them as when you want to. So, if you have less spare cash one month and don’t make an overpayment, it will not matter, because you will be making your regular mortgage payments anyway.
Will charges be applied for an early mortgage repayment?
Most lenders will charge you an exit fee or an Early Repayment Charge if you pay off the mortgage before term, especially if you are in a fixed interest rate deal. Usually the Standard Variable Rate mortgages have no Early Repayment Charges attached to them ,but it is always best to read your mortgage offer or contact your lender to make sure.
Usually lenders have a set amount of overpayments (around 10% of your loan amount) that you can make in a year. It is best to stick to the overpayment amount per year to avoid any unnecessary Early Repayment Charges.
Mortgage overpayment calculator
We have devised a calculator that calculates how making overpayments could save you money. Our calculator will show you the savings you will make on the interest on both monthly payments and lump sum payments.
All you have to do is put in some information on your mortgage and the calculator will do the rest.
Our mortgage overpayment calculator gives you a general idea of what your mortgage is likely to cost. The interest you save will vary because your interest rate will not stay the same over the whole term of your mortgage.