A mortgage overpayment is an additional payment made in addition to the normal monthly payment required by your lender.
Can I Make Overpayments?
You can usually overpay by as much as you want with a standard variable rate (SVR) mortgage. However, SVRs tend to be unpredictable as the rate is influenced by changes in the base rate set by the Bank of England and can fluctuate at the discretion of the lender. This means they can go up or down at any time, making it hard to factor in to your budget.
Overpayments can be made as lump sums or as regular overpayments throughout the year. Most fixed-rate mortgages and some tracker mortgages limit the amount that you can overpay your mortgage by. For many mortgages, the maximum overpayment is 10% of the outstanding balance per year, and you can be charged a penalty fee if you exceed this.
Depending on your mortgage terms, you may face an early repayment charge if you overpay by too much in a certain period or pay off your mortgage sooner than planned. This penalty, and the limits that lenders often impose on overpayments, is because the sooner you pay off your mortgage, the less money they will make from you in the form of interest.
Why Do People Overpay their Mortgage?
Many people choose to overpay their mortgage to increase their equity in their home and shrink their debt. Overpaying your mortgage can save you money on the total amount of interest you pay (due to you paying your mortgage off sooner).
If you’re being offered a low interest rate on your savings, you may benefit more from the interest you save on your mortgage from making overpayments. However, if the interest on your savings accounts higher, it can make more financial sense to keep your money where it is instead of making mortgage overpayments.
When considering making overpayments, you should consider whether you have any other outstanding debts and what the interest rate on these is. You should also consider any other financial commitments you have and weigh up the benefits of building things like an emergency savings fund for the unexpected. A financial adviser can help you consider your options.
Repayment Mortgages and Interest-only Mortgages
Repayment mortgages are when your mortgage payments go towards paying both the interest and some of the capital on your home. This means the overall amount you owe will get smaller each month and if you keep up with your repayments, your mortgage will be repaid at the end of the mortgage term.
Interest-only mortgages are when you only pay the interest incurred each month and do not pay off any of the capital on your home until the end of the mortgage term.
You can make overpayments on both repayment and interest-only mortgages. Overpaying on a repayment mortgage means your overpayment reduces the amount of outstanding loan on your mortgage. With interest-only mortgages, overpayments are usually only used to reduce future interest payments or the overall interest you pay, and won’t increase the equity you hold on your home.