Is it a good idea to overpay your mortgage?

Question

I have 14 years left on my mortgage and have just signed a five-year deal, which I fortunately got in place before interest rates started to rise in March.

With interest rates expected to rise, I wondered if overpaying was a good idea? If so, how should I go about overpaying?

Please can you also advise how much or little I can pay each month and can I change it from month to month depending on my income?

Darren’s answer

In many cases, yes, overpaying for your mortgage may be an excellent idea. For example, if you are comfortable keeping money in your possessions rather than keeping it easily on hand.

Paying off debts such as credit cards, personal loans, etc. – as well as establishing an emergency savings fund – will be beneficial using any available income you have.

I would also check your mortgage rate against the savings rates you can secure. This will determine whether a savings account will yield a better return, but given current UK interest rates, it may be better to pay off your mortgage.

The advantages of making an overpayment, especially since you have 14 years remaining, are:

• • Each overpayment can immediately reduce your mortgage balance, meaning less interest is charged
  • More of each monthly payment goes toward paying down the principal
  • You can either shorten your mortgage term and get out of the mortgage sooner or reduce future monthly payments (depending on your lender options).
  • In general, the shortest term provides the most benefit

Before making an overpayment, it’s important to check your lender’s limits, as overpayments can sometimes result in an early repayment fee (ERC).

Since you recently got a new fixed rate, you likely have a cap of 10% of your mortgage balance per year, which can be paid monthly or in a lump sum.

This will reduce each time you overpay, and it is important to make sure you do not exceed the limits.

You can check this in your mortgage offer or by contacting your lender directly.