Is a Mortgage Overpayment Worth It?

When and How to Overpay

With outstanding mortgage lending reaching a record £1,647.3 billion at the end of January 2025 and average mortgage interest rates sitting at 4.5% for new borrowers, you're probably feeling the pinch of rising mortgage costs. If you've got some spare cash sitting around, you might be wondering whether throwing it at your mortgage is the smart move. The short answer? It often is – but there are important things to consider first.

When to make mortgage overpayments

The sweet spot for overpaying your mortgage is when you've got your financial house in order elsewhere. Before you even think about overpayments, make sure you've built up an emergency fund and sorted out your pension contributions.

Consider overpaying when:

• Your mortgage rate is higher than what you can earn on savings accounts
• You're on your lender's standard variable rate (which usually has no overpayment restrictions)
• You've got spare cash that you won't need access to

Most fixed-rate mortgages allow you to overpay up to 10% of your outstanding mortgage balance each year without triggering early repayment charges.

Benefits of overpaying your mortgage

The maths on mortgage overpayments can be genuinely eye-opening. Santander's research shows that adding just £57 per month to a £200,000 mortgage at 4.5% over 25 years would save you £12,983 in interest and see you mortgage-free two years and one month earlier.

The key benefits include:

• Guaranteed returns. Your mortgage rate is effectively the guaranteed return you get on overpayments.
• Interest savings. Every pound you overpay reduces the balance that future interest is calculated on.
• Earlier freedom. You'll own your home outright sooner, freeing up monthly cash flow.

Disadvantages to paying your mortgage early

Overpaying isn't always the right move. The biggest drawback is liquidity – once that money goes into your mortgage, getting it back out isn't easy.

Consider the downsides:

• Better returns elsewhere. You might make more money by investing that cash instead of overpaying your mortgage.
• Early repayment charges. These typically range from 1-5% of the amount you're overpaying above your allowance.
• Cash flow constraints. Money tied up in your mortgage can't help with emergencies.

Is it smart to pay extra on your mortgage?

This depends on your circumstances and what else you could do with the money. If your mortgage rate is 4.5% and the best savings account offers 3%, then overpaying gives you a guaranteed 4.5% return.

However, if you're young with decades until retirement, investing might deliver better long-term returns. The key is comparing your mortgage rate against realistic returns from other options.

Lump sum vs monthly overpayments

Monthly overpayments offer flexibility – you can typically adjust or stop them if your circumstances change. Lump sum payments provide immediate impact on your balance and can be particularly effective if timed just before your lender recalculates interest.

Contact our qualified mortgage advisers today for personalised guidance on whether overpaying makes sense for your situation.