Should I overpay my mortgage? - Times Money Mentor (2024)

Mortgage overpayments are at a 20-year high as a result of rising interest rates.

Paying back your mortgage as soon as you are able means you will own your home outright more quickly and could save you money in the long run. But there are pros and cons to consider, including possible penalty fees from mortgage lenders.

This article covers:

• Should I overpay my mortgage?
• The pros and cons of overpaying your mortgage
• Is it better to invest instead of overpaying my mortgage?
• Will I be charged for overpaying my mortgage?
• How do I overpay my mortgage?

You can use our mortgage overpayment calculator to see how much you could reduce the term of your loan.

Should I overpay my mortgage?

Overpaying your mortgage means you pay off some of your loan on top of your monthly repayments.

You could agree with your lender to:

• Pay a fixed amount every month, therefore increasing your repayments
• Or transfer a lump sum of savings

Many lenders let you pay up to 10% of your mortgage balance every year without incurring any penalty fees. So for example, if you have a £250,000 mortgage, you could overpay by £25,000 a year free from charges.

Overpaying also means you will pay less interest overall.

For example, say you took out a £250,000 mortgage with an interest rate of 3.5%:

• After 25 years, you would have paid £375,596 at £1,252 per month, meaning you would have paid £125,596 in interest
• But after 15 years, you would have paid £321,768 at £1,788 per month, meaning £71,768 is interest

By overpaying by £536 a month, that’s a difference of £53,828.

But even overpaying your mortgage by a more manageable £68 per month can be a good idea. You shave two years and £11,152 off your total repayment amount.

It also means you own more equity in your home a lot sooner, which could also put you in a better position, should you come to remortgage.

For example, if you bought a home with a 5% deposit, you could overpay your mortgage so that by the time your deal ends you have 15% equity in your home. This will give you a better chance of being able to secure a new mortgage deal with a lower interest rate.

This is particularly useful now that interest rates are rising.

The other upside is that the money you save on mortgage interest may beat the returns you would get from putting the cash in a savings account.

With interest rates continuing to increase, it’s a good idea to review what you’re doing.

Find out: Is now a good time to remortgage?

Things to consider before overpaying your mortgage

Before you pay off some or all of your mortgage, there are several factors to bear in mind.

How good is your current mortgage deal?

Mortgage rates have been shooting up in 2023. The average two-year fixed rate mortgage deal has risen to more than 6% now from around 2% at the end of 2021.

Annual inflation remains historically high, causing lenders expect further rises in the Bank of England’s base rate.

If you have a fixed-rate mortgage deal well below current market rates, you may consider overpaying your mortgage while you have this benefit.

Factor in when your current mortgage deal will end – if it’s in the near future, greater overpayments may be worthwhile. This is because rates may still be near their current high level.

If your mortgage deal won’t end for some time, it’s possible that rates will fall back down to pre-pandemic levels, as the International Monetary Fund (IMF) believes. This means you may not see as great an advantage in making overpayments on your mortgage as others.

Nobody has a crystal ball and knows with any certainty what the future holds for mortgage rates. But if you’re lucky enough to have a cheap deal, it could be worth taking advantage of before it ends and overpaying as much as you can.

Do you have emergency savings?

It is important to have money on hand in the event of a financial emergency. That could be anything such as a broken boiler, car repairs or even having to cover bills after losing your job.

Your future self may appreciate being mortgage free as early as possible, but your present self may need the cash or a lump sum for emergencies.

For this reason, we recommend that you consider keeping between three and six months’ worth of your salary in an easy-access savings account.

See our pick of top-paying savings accounts.

Do you have other debts?

You should also think about any other debts you may have, such as credit cards, overdrafts or personal loans.

A mortgage probably costs you less in interest than other types of credit, so you should consider paying down the most expensive debt first.

By making it a priority to repay these debts, you could still give your overall finances a boost. This is because less of your monthly income will be needed to cover the repayments.

We have tips on how to manage your debt.

Are you paying into a pension?

If you aren’t already paying into a pension, you probably should be.

Contributions to pension schemes benefit from tax relief. We explain how that works in our guide on pensions.

And if you have access to a workplace scheme, your employer will pay in too, making this a very cost-effective way to save for retirement.

Pensions are a form of investment, albeit a very long-term one, as your money will go into the financial markets.

If you’ve got money to overpay your mortgage, it might be better spent by contributing into a pension instead.

We explore the benefit of investing instead of overpaying your mortgage in more detail later in this article.

Here is out top pick of the best ready-made personal pensions.

What about investing?

Would you be better off investing your spare cash instead?

As we mentioned above, it’s worth prioritising pensions because you get a cash boost from the government in the form of tax relief.

But if you think you might need the money before 55 (when you can access a private pension), investing in a stocks and shares ISA might make more sense.

We weigh up the pros and cons of overpaying your mortgage versus investing later in this guide.

Plus here are our top-rated stocks and shares ISAs.

Disadvantages to investing your money

When you overpay your mortgage, you will likely get an instant boost to your finances. Your debt will shrink straight away and you may have more disposable income.

The catch with investing is that your capital is at risk and returns are not guaranteed.

Much will depend on the performance of the investment you choose – and even if the long-term growth potential is good, you could still suffer short-term losses.

In other words, if you really want to see your money grow, you need to be prepared to consider tying it up for a longer period of 5 years or more, so that the investment can ride out market downturns and benefit from the good times.

If you’re new to investing, we have a guide for beginners.

There are also charges associated with investing – from the platform you use to buy assets such as funds, to the management of those funds.

Then there is the time and effort required in choosing the right investments for you.

We can help you out by listing our best stocks and shares ISAs.

So is it better to pay off your mortgage or invest?

What is right for you will depend on your own financial circ*mstances, as well as your goals and priorities. For many people, it will arguably be an emotional decision as much as a financial one.

It might be that you dream of being mortgage-free. Or you may be perfectly comfortable paying down your home loan but also the relish the idea of growing your money by investing in stocks.

So long as your wider finances are healthy (that is, you don’t have other debts to pay off that are charging higher rates) then both can be sensible options.

Best of both worlds

Working out whether to invest or overpay your mortgage doesn’t have to be an either/or choice.

If you bring down your mortgage repayments, you could use the money saved each month to invest and try building your future wealth. In this case, drip-feeding money into investments could be a sensible idea.

By investing on a regular basis it also means you get to take advantage of pound cost averaging. When markets fall, you may able to buy more units with your money. This gives you more growth potential when the stock market bounces back.

For many people, this can be a lower-risk and less stressful way to invest. Depending on the markets, it can also be more profitable too.

Alternatively, if you have a big lump sum, you could enjoy the best of both worlds straight away and use some of the money to reduce your mortgage and use the rest to invest.

Read more: how to invest £10,000

Will I be charged for overpaying my mortgage?

It depends. Most lenders allow you to pay 10% of your mortgage balance as an overpayment each year without facing a penalty fee.

If you want to pay more than that then you might incur early repayment charges. These fees are often calculated as a percentage of your mortgage balance. The bigger the overpayment payment, the more you will be liable for in charges.

Early repayment charges (ERC) are typically between 1% and 5%. So for a repayment of £50,000 with an ERC of 3%, the total fee payable would be £1,500.

These fees might be tiered: in other words they usually start high and fall over time. So for example, it might be 5% in year one but drop to 1% in year five.

How do I overpay my mortgage?

Decided that you want to overpay your mortgage?

First use a mortgage overpayment calculator to give you an idea of how much you could save by overpaying. You likely want to try to take a good chunk out of your loan and possibly put yourself in a lower loan-to-value category.

To overpay your mortgage debt, you should:

Understand the costs

Make sure you understand whether you will incur any fees by overpaying your mortgage. Your mortgage documents will have this information or you can contact your lender.

If you will have to pay fees then it might be good to speak to a mortgage adviser who can help you understand whether it’s worth overpaying.

Here are our top-rated mortgage brokers.

Contact your lender

Most lenders have systems that let you overpay online which might be the easiest option. You can also call or go into a local branch to arrange the overpayment.

Your mortgage lender may offer you a number of options:

• Increasing your monthly repayments each month and shortening your mortgage term
• Using an overpayment lump sum to shorten your mortgage term while keeping your repayments the same
• Or using an overpayment to reduce future monthly repayments

The first two options have the advantage that they reduce the size of your debt and shorten your mortgage term.

Once you have decided, you agree with your lender on how the payment will be taken.

Find out more: How soon can you remortgage?

What to do after paying off your mortgage

Well done! You’ve paid off your mortgage debt. But don’t put your feet up just yet. There are a few things to consider next:

1. Check your property is registered with the Land Registry: registering a property protects you from squatting and fraud. The fee you pay depends on the value of your home. You can calculate your fee using the Land Registry’s calculator.
   
2. Get a copy of the deeds to your home: your solicitor or mortgage holder may have them but if not then fill in the deeds request form from the government website.
   
3. Top up your savings: to have that “rainy day” fund of three to six months’ living costs sorted, you can start saving in an easy-to-access savings account or consider Premium Bonds.
   
4. Reflect on your retirement plan: do you want to retire early or increase your pension contribution? A pension is a great place to put spare cash due to the tax relief.
   
5. Invest any extra cash if you have a five to ten year horizon: a stocks and shares ISA could be the perfect home for your spare cash. A ready-made stocks and shares ISA is a simple and hassle-free way to start investing as you don’t need to pick and choose the investments yourself. We outline the best ones.