If you’re facing higher mortgage rates when your current deal expires, it’s worth considering using the flexible feature of a home loan that allows you to soften the blow.
By overpaying on your mortgage, you can help reduce the impact of a repayment hike when remortgaging comes around.
That’s because when you come to remortgage, the balance will be reduced and so you’ll be paying interest on a smaller sum.
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Many borrowers coming to the end of a fixed rate will be faced with remortgage deals that are far higher than we've all been used to. So if you have cash to spare, you may be thinking about whether you should overpay your mortgage.
Overpaying your mortgage means you can drastically reduce the interest you pay to your lender allowing you to become mortgage-free sooner. Borrowers who overpay and reduce their mortgage's loan-to-value (LTV) may also find that they have access to a broader range of better rates when the time comes to remortgage.
You can overpay as a regular monthly amount, as a lump sum or a combination of both. Most lenders let their customers repay up to 10% of their mortgage balance a year without charging an early repayment penalty – some banks allow higher overpayments. Make sure you check the terms of your mortgage in the original paperwork. If you can’t find it, contact your lender.
Once you know how much you can overpay you can start to crunch the numbers. Our mortgage overpayment calculator helps you work out how much your monthly balance may change as a result of making overpayments and helps you decide if it is worth it.
Mortgage overpayment calculator
How overpaying your mortgage can save you thousands in interest
Overpaying your home loan can have a big impact.
For a homeowner with a £300,000 mortgage on a two-year fixed rate of 5.39%, over a 25-year term, overpaying by £100 a month would save £29,030 in interest and mean you'll be mortgage-free two years and six months early, according to the broker L&C Mortgages.
Alternatively, a one-off lump sum overpayment of £5,000 would save you £13,701 in interest and would reduce your mortgage term by 10 months.
Even if you're on a cheaper mortgage deal, overpaying can have a meaningful impact.
For example, if you overpaid by £100 a month on a £300,000 mortgage, with a rate of 2.15%, you'd save £8,734 in interest and your mortgage would be paid off two years and four months sooner.
If you used a one-off lump sum overpayment of £5,000, with the 2.15% rate you'd pay £3,496 less in interest and be mortgage-free seven months early.
What to consider before overpaying your mortgage
Before deciding to plough your money into your mortgage, it’s important to make sure it’s the right choice.
The first step is to ensure that you have a robust savings buffer in place equal to three or six months of your income to cover living expenses should anything happen to your income.
If that’s in place and you’re comfortable that you have money to spare to overpay on your mortgage, you should speak to your lender to check the terms of your loan to check if your mortgage allows overpayments and what you can overpay without penalty.
It’s worth reminding yourself that once you hand it over as an overpayment, you no longer have access to that cash so you need to be sure it’s money you don’t need.
We highlight what to consider if you're deciding whether to overpay your mortgage or invest in a separate guide.
Are mortgage overpayments worth it?
The sooner you pay off the loan, the less interest you will pay. Overpaying will help reduce the mortgage balance that you pay interest on and help you pay it off faster.
Using some of your savings to reduce your mortgage debt might also benefit you if it places you into a lower loan-to-value (LTV) bracket. Lenders offer cheaper rates the more equity you have in your home, so by overpaying you might tip into a lower LTV bracket and become eligible for a better rate
For most lenders the cheapest mortgage rates are offered to those with an LTV of 60% or less. So if your LTV was just above that, using savings to pay off some of the mortgage means you could benefit from a reduced rate of interest when you next come to remortgage.
Whether it’s worth it for you will depend on your personal circumstances, financial situation and goals.
If you need advice you can speak to a mortgage broker who can help you with what’s right for you.
We explore offset mortgages in our "what is an offset mortgage" guide.
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