How Do Mortgage Overpayments Work?
Mortgage overpayments are additional payments you make on top of your regular monthly mortgage payment. Understanding how they work can help you save thousands of pounds in interest and become mortgage-free sooner.
What Is a Mortgage Overpayment?
A mortgage overpayment is any payment you make above your contractual monthly mortgage payment. When you make an overpayment, the extra money goes directly towards reducing your outstanding mortgage balance—the capital you owe.
Because mortgage interest is calculated on your outstanding balance, reducing this balance means you'll pay less interest over the remaining term of your mortgage.
How Overpayments Reduce Interest
Mortgages use compound interest, which means you pay interest on your outstanding balance each month, with interest often calculated daily. The mechanics work like this:
- Your monthly payment is split between interest and capital repayment
- Interest is calculated on the outstanding balance daily for most mortgages
- Capital is the portion that reduces your mortgage balance
- Overpayments reduce your balance further, so less interest accrues
Example
Imagine you have a £200,000 mortgage at 3.5% interest over 25 years. Your monthly payment would be around £1,001.
If you overpay £2,000 in year one, that £2,000 comes off your balance immediately. You'll then pay 3.5% less interest on that £2,000 for the next 24 years—saving you approximately £1,960 in interest alone.
Making Overpayments
Usually banks will allow you to make overpayments at any time without charge as long as you don't go over a certain threshold, else you can incur Early Repayment Charges (ERC) which can wipe out any benefits you'd get from overpaying. To learn more about this threshold you can read our guide here.
Each bank has their own method on how you send the payments, but for most it's as simple as sending money to your mortgage account, like you were sending money to any other account. If you decide to start overpaying it's up to you to decide how you want to do it.
Monthly Overpayments
Adding extra to your regular monthly payment. For example, if your payment is £1,000, you might pay £1,100 instead.
- Reduces your balance gradually throughout the year
- Saves slightly more interest than annual overpayments
- Easier to budget for smaller, regular amounts
Annual Overpayments
Making one larger payment once per year, such as using a bonus or tax refund.
- Simpler to manage administratively
- Good if you have irregular income or lump sums
- Many calculators (including ours) model annual overpayments
Use Our Calculator
Our Mortgage Overpayment Calculator shows you exactly how much you can save based on how much you want to overpay.
Things to Consider
Overpayment Limits
Most UK mortgage lenders allow you to overpay up to 10% of your outstanding balance per year without penalty. Exceeding this may trigger early repayment charges (ERCs). Always check your mortgage terms. You can read more on this here.
Flexibility
Once you overpay, you typically cannot get that money back (unless you have a flexible mortgage product). Make sure you maintain an emergency fund before committing to regular overpayments.
Alternative Uses for Money
Consider whether overpaying your mortgage is the best use of your money. If you have high-interest debt (like credit cards), it usually makes more sense to pay that off first.
Common Questions
Do overpayments reduce the term or the monthly payment?
By default, overpayments reduce the term of your mortgage—meaning you'll be mortgage-free sooner. Some lenders allow you to reduce your monthly payment instead, though this saves less interest overall.
Can I overpay during a fixed-rate period?
Yes, but you're typically limited to 10% per year. If you overpay more than the allowed amount during a fixed-rate period, you may incur early repayment charges.
What happens if I miss an overpayment?
Overpayments are voluntary. If you choose not to make an overpayment in a particular month or year, you simply continue with your regular payments. There's no penalty for not overpaying.
Is it worth overpaying on my mortgage?
Like most things in life - it depends. You can view our opinion on this here.
Ready to Calculate Your Savings?
Use our free calculator to see exactly how much you could save by overpaying your mortgage.