Should you overpay your mortgage?
A modest monthly overpayment can knock years off your mortgage and save tens of thousands in interest, because every extra pound goes straight at the balance. Here is how it works, a worked example, the one limit to watch, and when overpaying isn't the best use of your money.
Why a mortgage costs so much: interest first
A repayment mortgage is a fixed monthly payment worked out so the loan clears exactly at the end of the term. The catch is the order: early on, most of each payment is interest, and only a little clears the balance. That flips over the years, but it's why a 25-year mortgage costs far more than the amount you borrowed.
On a £250,000 mortgage at 4.5% over 25 years, the monthly payment is about £1,390, and you'd pay roughly £167,000 in interest over the full term, on top of the £250,000 you borrowed.
How overpaying saves you money
An overpayment doesn't sit in a pot earning a little interest. It comes straight off the balance, so from that month on you're charged interest on a smaller loan, every month, for the rest of the term. That compounds in your favour, which is why even a small overpayment has an outsized effect.
Same £250,000 mortgage at 4.5% over 25 years, with a regular monthly overpayment on top:
| Extra each month | Mortgage-free | Interest saved |
|---|---|---|
| £100 | ~3 years early | ~£22,000 |
| £200 | ~5 years early | ~£38,000 |
| £300 | ~7 years early | ~£52,000 |
£200 a month extra on this mortgage clears it about five years early and saves roughly £38,000 in interest, for £200 you were arguably going to spend anyway.
See what overpaying saves on your mortgage
Enter your balance, rate and term, add a monthly overpayment, and see the years and interest you'd save, updated live.
Open the Mortgage calculator →Watch the 10% overpayment limit
Most fixed-rate deals let you overpay up to 10% of the outstanding balance each year without penalty. Go beyond that during a fixed period and you can trigger an early repayment charge, often 1% to 5% of the amount, which can wipe out the saving. Check your lender's specific limit before you set up an overpayment, and note that once your fixed deal ends you can usually overpay freely.
Overpay or invest? The honest trade-off
Overpaying gives you a guaranteed, risk-free, tax-free return equal to your mortgage rate. If your rate is 4.5%, overpaying is like earning a guaranteed 4.5%. The alternative is investing that money instead:
- If investments should beat your mortgage rate after tax, especially inside a pension or ISA with tax relief, investing may build more wealth over the long run, but returns aren't guaranteed.
- Clear expensive debt first. Credit cards and loans usually cost far more than a mortgage, so they come before both overpaying and investing.
- Keep an emergency fund. Money overpaid into a mortgage is hard to get back, so don't overpay your safety net away.
Plenty of people do a bit of both. Compare the guaranteed saving above with what the same money might grow to using the Compound Growth calculator.
Frequently asked questions
How much does overpaying save?
On a £250,000 mortgage at 4.5% over 25 years, £200 a month extra clears it about five years early and saves roughly £38,000 in interest.
Is there a limit on overpayments?
Most fixed deals allow up to 10% of the balance a year penalty-free. Beyond that you may face an early repayment charge. Check your lender.
Should I overpay or invest?
Overpaying is a guaranteed, tax-free return equal to your rate. Investing may beat it with risk. Clear expensive debt and keep an emergency fund first.
Does overpaying cut my payment or my term?
By default most lenders keep the payment the same and shorten the term, which saves the most interest. Some let you lower the payment instead.
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Illustrative and educational only, not financial or mortgage advice. Figures assume a repayment mortgage at a constant 4.5% for the whole term; real rates change at each re-fix, and this ignores fees and early repayment charges. Your own numbers will differ. Always check the details with your lender or a mortgage adviser.