Is Overpaying Your Mortgage The Best Financial Move?

 

Making additional mortgage payments will help you pay off your debt more quickly, bringing the day when you are mortgage-free much closer.

Shrinking the outstanding amount can be especially useful when it comes to remortgaging, as mortgage rates today may be higher than when you last fixed your rate.

The Bank of England expects a third of people with mortgages to find their monthly payments increase by more than £100 by the end of 2026 – thanks to people moving off fixed-rate mortgage deals and having to remortgage at a higher rate.

So, should you make overpayments on your mortgage?  We look at the pros and cons…

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What are the benefits of overpaying your mortgage?

The Bank of England’s base rate has been hovering near to a 15-year high and, since this is used by lenders to determine interest rates on mortgages and other loans, the cost of borrowing generally is higher.

Many people with mortgages are concerned that when their current fixed-rate mortgage deal comes to an end, they will have to fix again at a higher rate of interest. That will mean their monthly repayments jump.

By making overpayments – additional payments on top of the agreed monthly repayment – you can pay off more of the capital and interest on your home loan.

There are three ways overpayments can help:

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1. You could pay less interest overall

Say your current fixed-term mortgage has an interest rate of 2.3%. You took this out a few years ago when the Bank of England’s base rate was lower, so mortgage rates were also lower too.

The interest being added to the outstanding balance on your mortgage is relatively low – compared to the Bank of England’s 4.75% base rate.

So, it makes sense to be paying off more of your mortgage balance now, as the interest added will be calculated at 2.3%.

If this fixed-rate deal comes to an end, you may be remortgaging onto a fixed rate of 4% or higher.

Having a higher balance in addition to a much higher interest rate will mean overall paying far more for your home.

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2. It can reduce your loan to value

An important figure to think about with mortgages is loan to value (LTV).

The more equity you have in your home, or the bigger your deposit, the smaller the loan (or mortgage amount) you will be getting.

This is important because lenders see people with higher loan to values as risky, so they often charge them higher interest rates.

For example, say you need to borrow £370,000 on a property valued at £420,000. You would have a loan to value of 88% which puts you in the category of “up to 90% LTV”.

Someone who buys the house next door, borrowing £300,000 on a property valued at £420,000 would have a loan to value of 71% and be in the category of “up to 75% LTV”. Because they have more equity and need a smaller loan, they would likely be offered a lower interest rate.

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3. You could reduce the length of your mortgage

The property market has cooled recently but prices are still close to record highs. As property prices have risen, people have been taking on longer mortgages because spreading the mortgage out over a longer period is the only way to make it affordable in many cases.

A 25-year mortgage was once the norm, but younger generations often have 30-year or even 35-year mortgages. Making overpayments can reduce the overall length of your mortgage and give you more mortgage-free years where you can focus on saving for retirement.

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Will I be charged for overpaying my mortgage?

The terms of each mortgage are different, so you need to check, but often lenders allow you to make overpayments equivalent to 10% of your outstanding balance each year before any penalty is charged.

By year, lenders mean the 12 months since taking your mortgage out. By outstanding balance, they normally mean the figure at the start of the current 12-month period.

If you are intending to max out your mortgage overpayments, it’s imperative that you contact your lender first and ask how much you can overpay by and what penalties are involved.

Some mortgages allow unlimited overpayments without penalty although these tend to have a higher interest rate. You might consider switching to one of these if you’re committed to paying off your mortgage early – although you should speak to a mortgage broker before making any decisions which may affect your financial future.

Early repayment charges (ERC) are typically between 1% and 5% of your outstanding mortgage balance.

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The drawback of overpaying your mortgage

There are pros and cons to overpaying your mortgage, the main drawback being that it’s difficult to get the money back if you need it.

Capital stored up in your property is difficult to release. Selling the property or releasing equity from your home can be both time-consuming and expensive. Other debts might be costing you more to service, so pay those off first, and then watch out for early repayment charges and other fees that might wipe out any advantages.

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Things to consider before overpaying your mortgage

By how much should I overpay my mortgage?

First you need to check that making overpayments is allowed under the terms of your mortgage and, if so, how much you can overpay before incurring a penalty.

Fixed-rate mortgages usually allow you to make overpayments up to 10% of your outstanding balance each year. You will need to be careful when calculating this, as paying above the set amount can mean paying a hefty penalty charge.

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Do you have loans or credit card debt?

Although a mortgage is the biggest loan that most people ever take out, the interest rates you are paying on loans, credit cards or even by living in your overdraft will probably be far higher than those you would pay on a mortgage.

It’s relative – the size of your mortgage is so big that the amount of interest it accumulates each year seems enormous too. By contrast, a few grand on a credit card or being £800 overdrawn may not seem as much, but overdrafts are among the most expensive kinds of debt with rates of up to 40%.

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Do you have sufficient savings?

An illness that means you can’t work, a bereavement, redundancy or unexpected bills – if the worst happens you don’t need financial stress on top of that.

If you don’t have three to six months’ expenditure saved, it’s a goal that you may want to work towards.

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Are you paying into a pension?

It’s understandable that many people want to get rid of their mortgage once and for all. However, the other big financial priority in life is saving for retirement.

Previous generations had 25-year mortgages, and it wasn’t unusual for someone to have a mortgage in their twenties. The benefit of this set-up was that many people would expect to have paid off their mortgage in their fifties or early sixties, which gave them time to channel income from work towards their pension, instead of the mortgage.

Today, it’s much harder to juggle pension saving with paying off a massive mortgage, particularly with the current high cost of living.

It doesn’t have to be a case of one or the other – mortgage overpayments versus pension contributions. It’s worth thinking of how you can balance both.

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How do I make mortgage overpayments?

Some lenders allow you to phone them and make debit card payments ad-hoc. With others you can make transfers from your current account, either setting up a standing order or on an ad-hoc basis. You could also increase the size of your regular direct debit or standing order.

Check your online mortgage account or any mortgage paperwork you have for details of which options for overpayment are available. Or give your mortgage lender a call.

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Quealy & Co Financial Services Ltd. can help with your mortgage

For mortgage advice with no broker fees, book your mortgage appointment with Quealy & Co Financial Services Ltd.

Our Financial Services team at Quealy & Co are ready to help first-time buyers, current homeowners, and property investors. Get in touch with our friendly team to find out how we can help you get the best deal.

01795 505761⁠

mortgages@quealy.co.uk⁠ 

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**Your home may be repossessed if you do not keep up repayments on your mortgage.**

Quealy & Co Financial Services Ltd. is authorised and regulated by the Financial Conduct Authority No. 919693