What difference can small overpayments make to your mortgage?

Homeowners overpaying on their mortgage by just £5 a month could save thousands of pounds in the long-run.

Paying a little extra on your monthly bill reduces the amount of interest you'll be charged and speeds up the process of becoming mortgage-free.

According to the Equity Release Council, homeowners overpaid their mortgages by a record £6.7 billion in the final three months of 2022 as they fought to combat interest rate rises.

Here, Which? crunches the numbers to show how much small overpayments could save you, and what to be aware of before doing so.

How does overpaying reduce mortgage interest?

Overpaying your mortgage can be a great way to save money over the term of your mortgage - especially in today's high interest environment where the average two-year fix is 6.15% and a five-year fix is 5.79%. 

While you won't feel any benefit in the short-term you'll pay back the loan quicker and pay less interest overall. Depositing even just a little extra each month can make a big difference. 

The table below shows how much you could theoretically save if you overpaid a set amount each month. We've calculated the figures based on a £200,000 mortgage with a 25-year term and interest rate of 6.15%.

The interest you pay will vary depending on the deal you've signed up to and the length of your fixed term. But the above table sheds light on how extra overpayments can make a substantial difference.

• Find out more: how do mortgage payments work? 

Mortgage overpayment calculator

Our mortgage overpayment calculator can help you get a broad idea of how your extra payments could impact your loan.

To get started, enter your balance, term, interest rate and proposed overpayment.

For an accurate picture of how overpaying could affect your balance and term, speak to your mortgage lender.

How often can I overpay on my mortgage?

If you plan to overpay, you might find it's not possible to consistently commit to the extra payment each month. That isn't an issue as the vast majority of mortgages allow you to make ad-hoc overpayments on a monthly basis or as a lump sum.

Should you wish to pay an extra £100 one month, and nothing extra the next, and £20 the month after, you may be able to do so. 

Having the extra cash available to make overpayments isn't something open to everyone in the cost of living crisis, but if you can, you will reap the rewards in the long-term.

Could I be penalised for overpaying?

Anyone considering overpaying needs to be wary of their lender's early repayment charge (ERC), yet small overpayments are unlikely to trigger any penalty.

An ERC is a sanction imposed by your provider should you overpay on your mortgage by more than it allows, or pay off the whole loan too early.

Most mortgage deals will let you pay up to 10% of your balance as an overpayment each year.

The extent of the penalty varies depending on the lender. It is usually a percentage of the outstanding mortgage - typically between 1% and 5%.

Which? Money Podcast

Join us on our weekly audio show for the latest money news and personal finance hacks to help make you better off.

Listen now

Should I overpay before I remortgage?

If you're one of the 700,000 homeowners due to come off a cheap fixed deal in the next six months, now could be a good opportunity to consider overpaying on your current deal.

If you have some extra cash, overpaying before you come to remortgage may give a better chance of switching to a less expensive deal when the time comes.

This is because the best products are available to people with more equity in their home.

By increasing the equity in your home, you cut your loan-to-value (LTV). Cheaper mortgage rates are offered for those remortgaging at 75% LTV rather than 80% LTV, for example.

• Find out more: loan-to-value (LTV) calculator

Things to consider before overpaying 

It's important to not leave yourself short of cash, as once you've spent the money on your mortgage you'll struggle to get it back.

Make sure you've assessed your finances and have budgeted to keep an emergency fund in case your circumstances suddenly alter. 

If you have other more expensive debts such as personal loans or credit cards, you're likely to be better off prioritising paying these off first before ploughing extra funds into your mortgage.

You may also find that there are other beneficial ways of spending extra cash, such as paying into your pension or putting money into a savings account.

• Find out more: how to find the best savings account

Should I shorten my mortgage term?

If you have budgeted and are certain you can afford to pay extra each month, you could ask your provider to shorten your mortgage term. For example, your 25-year repayment plan could be lowered to 20 years.

Rather than overpaying on an on-off basis, you will be committing to increasing your monthly bill.

Using the same example as above (6.15% interest on a £200,000 loan), the table below shows how much you could save in interest by switching to a shorter mortgage term.

Anyone considering shortening their payment plan needs to speak with their lender.