Understanding Early Repayment
Early mortgage repayment, also known as overpayments, allows you to pay more than your required monthly payment to reduce your mortgage balance faster. This strategy can save you thousands of pounds in interest and help you become mortgage-free years earlier.
Types of Overpayments
- Regular overpayments - Additional amount added to monthly payments
- Lump sum overpayments - One-off payments using savings or windfalls
- Annual overpayments - Yearly payments using bonuses or tax refunds
Benefits of Early Repayment
Making overpayments offers several significant advantages:
- Interest savings - Reduce total interest paid over the mortgage term
- Shorter mortgage term - Become mortgage-free years earlier
- Increased equity - Build ownership in your property faster
- Financial freedom - Eliminate monthly mortgage payments sooner
- Peace of mind - Reduce debt burden and financial stress
Calculate Your Overpayment Savings
See how much you could save with our overpayment calculators.
Try Overpayment CalculatorOverpayment Strategies
Regular Monthly Overpayments
Adding a fixed amount to your monthly payment is the most consistent approach. Even small amounts can make a significant difference over time.
Annual Lump Sum Payments
Using annual bonuses, tax refunds, or inheritance to make substantial overpayments can dramatically reduce your mortgage term.
Offset Mortgages
Link your savings to your mortgage to reduce interest without making actual overpayments, maintaining access to your funds.
Important Considerations
Early Repayment Charges (ERCs)
Many mortgages allow penalty-free overpayments up to 10% of the outstanding balance annually. Check your mortgage terms before making large overpayments.
ERC Warning
Typical ERC structure: 5% in year 1, 4% in year 2, 3% in year 3, 2% in year 4, 1% in year 5, then 0%
Example: Overpaying £20,000 in year 1 on a £200,000 mortgage with 5% ERC = £1,000 penalty
10% allowance: Most lenders allow 10% overpayment penalty-free annually (£20,000 on £200,000 mortgage)
Always check: Review your mortgage offer document or contact your lender before overpaying more than 10%
Alternative Investments
Consider whether investing surplus funds might provide better returns than mortgage overpayments, especially with low interest rates.
Emergency Fund Priority
Ensure you maintain adequate emergency savings (3-6 months expenses) before committing to significant overpayments. Once paid into your mortgage, funds are locked and cannot be easily accessed.
Real-World Overpayment Examples & Savings
Understanding the actual impact of overpayments helps you make informed decisions. Here are detailed examples showing realistic savings:
Example 1: £100/Month Overpayment on £200,000 Mortgage
Scenario Details
Original Mortgage: £200,000 at 4.5% over 25 years
Original Monthly Payment: £1,111
Total Interest (no overpayment): £133,300
Total Cost: £333,300
With £100/Month Overpayment:
New Monthly Payment: £1,211
New Term: 21 years 3 months (save 3 years 9 months)
Total Interest: £109,850
Total Cost: £309,850
Total Savings: £23,450
Return on Investment: Your £100/month (£25,500 total extra paid) saves you £23,450 in interest - effectively a 92% return! Use our overpayment calculator to model your scenario.
Example 2: £5,000 Annual Lump Sum on £300,000 Mortgage
Scenario Details
Original Mortgage: £300,000 at 5% over 30 years
Original Monthly Payment: £1,610
Total Interest (no overpayment): £279,600
Total Cost: £579,600
With £5,000 Annual Lump Sum:
Monthly Payment: £1,610 (unchanged)
New Term: 18 years 7 months (save 11 years 5 months)
Total Interest: £156,200
Total Cost: £456,200 (including £93,000 in lump sums)
Total Savings: £123,400
Strategy: Using annual bonuses or tax refunds for lump sum overpayments creates massive savings. This approach is ideal if you have irregular income or receive annual bonuses.
Example 3: Combined Strategy - £200/Month + £3,000 Annual
Scenario Details
Original Mortgage: £250,000 at 4.8% over 25 years
Original Monthly Payment: £1,445
Total Interest (no overpayment): £183,500
Total Cost: £433,500
With £200/Month + £3,000/Year:
New Monthly Payment: £1,645
New Term: 14 years 2 months (save 10 years 10 months)
Total Interest: £84,300
Total Cost: £334,300 (including £76,200 in overpayments)
Total Savings: £99,200
Best of Both: Combining regular monthly overpayments with annual lump sums maximizes savings and flexibility. Check your affordability to determine sustainable overpayment levels.
Overpayment Impact Comparison Table
| Mortgage Amount | Rate | Overpayment | Time Saved | Interest Saved |
|---|---|---|---|---|
| £150,000 | 4.5% | £50/month | 2 years 4 months | £10,200 |
| £200,000 | 4.5% | £100/month | 3 years 9 months | £23,450 |
| £250,000 | 5.0% | £150/month | 4 years 8 months | £38,900 |
| £300,000 | 5.0% | £200/month | 5 years 3 months | £54,600 |
| £400,000 | 5.5% | £300/month | 6 years 1 month | £89,400 |
10% Penalty-Free Overpayment Limit Explained
Most UK mortgages allow you to overpay up to 10% of the outstanding balance each year without incurring Early Repayment Charges (ERCs). Understanding how this works is crucial for maximizing overpayments while avoiding penalties.
How the 10% Limit Works
10% Calculation Example
Outstanding Balance: £200,000
10% Allowance: £20,000 per year
Monthly Allowance: £1,667 (£20,000 ÷ 12)
Can You Overpay: Yes, up to £20,000 in any 12-month period without penalty
Important Notes:
- The 10% is calculated on the balance at the start of the year (or when you took the mortgage)
- Some lenders recalculate annually, others use the original balance
- Unused allowance typically doesn't roll over to the next year
- The limit applies to the total overpayment, not per payment
What Happens If You Exceed 10%?
If you overpay more than your 10% allowance during a fixed or discounted rate period, you'll typically face Early Repayment Charges (ERCs) on the excess amount:
- ERC on excess only: If you overpay £25,000 on a £200,000 mortgage (10% = £20,000), ERCs apply only to the £5,000 excess
- Typical ERC rates: 1-5% of the excess amount, depending on how many years remain in your fixed period
- Example penalty: £5,000 excess × 3% ERC = £150 penalty
- Worth it?: Sometimes paying a small ERC is worthwhile if you're saving significantly more in interest
Lenders with Different Overpayment Allowances
| Lender | Overpayment Allowance | Notes |
|---|---|---|
| Nationwide | 10% per year | Calculated on original balance |
| Halifax | 10% per year | Recalculated annually |
| Santander | 10% per year | Some products allow unlimited |
| HSBC | 10% per year | Calculated on current balance |
| First Direct | 10% per year | Flexible overpayment options |
| Barclays | 10% per year | Some products allow 20% |
Always check your specific mortgage terms - allowances vary by product and lender. Contact your lender or check your mortgage offer document for exact details.
Offset Mortgages: Overpayment Alternative
Offset mortgages link your savings and current accounts to your mortgage, reducing the interest you pay without actually making overpayments. This provides flexibility while achieving similar savings.
How Offset Mortgages Work
Offset Example
Mortgage Balance: £200,000 at 5%
Savings Account: £30,000
Effective Mortgage: £170,000 (£200,000 - £30,000)
Interest Charged On: £170,000 only
Annual Interest Saving: £1,500 (£30,000 × 5%)
Key Benefit: You maintain full access to your £30,000 savings while reducing mortgage interest. Perfect for those who want flexibility or may need emergency funds.
Offset vs Traditional Overpayment
| Feature | Offset Mortgage | Traditional Overpayment |
|---|---|---|
| Access to Funds | ✅ Full access anytime | ❌ Locked in mortgage |
| Interest Savings | ✅ Immediate | ✅ Immediate |
| Flexibility | ✅ Very high | ⚠️ Limited |
| Interest Rates | ⚠️ Typically 0.2-0.5% higher | ✅ Standard rates |
| Savings Interest | ❌ No interest earned | ✅ Can earn separately |
| Best For | Self-employed, irregular income | Stable income, disciplined savers |
Who Should Consider Offset? Self-employed individuals, those with irregular income, people who want emergency fund access, or anyone who values flexibility over absolute lowest rates. Use our repayment calculator to compare scenarios.
Frequently Asked Questions
Can I overpay my mortgage without penalty?
Most UK mortgages allow penalty-free overpayments up to 10% of the outstanding balance per year. For example, on a £200,000 mortgage, you can overpay up to £20,000 annually without Early Repayment Charges (ERCs). This 10% limit typically applies during fixed, tracker, or discounted rate periods. Once you're on your lender's Standard Variable Rate (SVR), you can usually overpay unlimited amounts without penalty. Always check your specific mortgage terms, as some lenders offer higher allowances (15-20%) or unlimited overpayments on certain products.
How much can I save by overpaying £100 per month?
On a typical £200,000 mortgage at 4.5% over 25 years, overpaying £100/month saves approximately £23,450 in interest and reduces your mortgage term by 3 years 9 months. On a £300,000 mortgage at 5%, the same £100/month overpayment saves around £35,200 and cuts 3 years 6 months off your term. The exact savings depend on your interest rate, remaining term, and outstanding balance. Higher interest rates and longer remaining terms produce greater savings. Use our overpayment calculator for personalized calculations based on your mortgage details.
Should I overpay my mortgage or invest the money?
This depends on your mortgage rate, investment returns, risk tolerance, and personal circumstances. Overpaying your mortgage provides a guaranteed return equal to your mortgage rate (e.g., 4.5% mortgage = 4.5% guaranteed return). Investing might offer higher returns (historically 7-10% annually in stocks) but carries risk and isn't guaranteed. Consider overpaying if: your mortgage rate is above 4%, you're risk-averse, you want guaranteed returns, or you're close to retirement. Consider investing if: your mortgage rate is below 3%, you have a long time horizon (10+ years), you're comfortable with risk, and you've maximized pension contributions. Many people do both - overpay some and invest some for balanced approach.
What happens to overpayments if I remortgage?
Overpayments reduce your mortgage balance permanently, so when you remortgage, you'll be borrowing less. For example, if you overpaid £20,000 on a £200,000 mortgage, your new mortgage would be based on the reduced balance (£180,000 minus any additional payments made). This lower balance means lower monthly payments or a shorter term on your new mortgage. Overpayments also increase your equity, potentially giving you access to better loan-to-value (LTV) rates when remortgaging. If you've reduced your LTV from 80% to 75% through overpayments, you may qualify for rates 0.2-0.5% lower. Check our remortgage calculator to see potential savings.
Can I reduce my monthly payment instead of shortening the term?
Yes, most lenders allow you to choose between two options when overpaying: (1) Keep monthly payments the same and reduce the mortgage term, or (2) Reduce monthly payments and keep the term the same. Option 1 (reducing term) saves more interest overall and is the default for most lenders. Option 2 (reducing payments) provides immediate cash flow relief but saves less interest long-term. Some lenders require you to contact them to switch between options. You can also use a combination - overpay for several years to reduce the balance, then request lower monthly payments. This strategy is popular for those approaching retirement or expecting income changes.
Are there any downsides to overpaying my mortgage?
Yes, several potential downsides to consider: (1) Liquidity: Once paid into your mortgage, funds are locked and can't be easily accessed for emergencies, (2) Opportunity cost: Money overpaid can't be invested elsewhere for potentially higher returns, (3) Early Repayment Charges: Overpaying beyond your allowance (typically 10%) incurs penalties of 1-5%, (4) Inflation benefit: Inflation effectively reduces your debt over time, so paying off cheap debt quickly may not be optimal, (5) Pension contributions: Overpaying mortgage instead of maximizing pension contributions loses tax relief (20-45%). Always maintain 3-6 months emergency savings before aggressive overpayments.
How do I make an overpayment on my mortgage?
Most lenders offer multiple overpayment methods: (1) Online banking: Log into your mortgage account and make a one-off payment or set up regular overpayments, (2) Phone: Call your lender to arrange overpayments, (3) Standing order: Set up a separate standing order for the overpayment amount in addition to your regular payment, (4) Lump sum: Transfer funds directly to your mortgage account. Always specify that the payment is an overpayment (not an advance payment of future months). Some lenders require you to complete a form or call to confirm overpayments. Check your mortgage statement after 1-2 months to confirm the overpayment reduced your balance, not just paid future months in advance.
Can I overpay if I'm on a fixed rate mortgage?
Yes, you can overpay on a fixed rate mortgage, but you're typically limited to 10% of the outstanding balance per year without incurring Early Repayment Charges (ERCs). For example, on a £250,000 fixed rate mortgage, you can overpay up to £25,000 annually penalty-free. If you overpay more than this allowance, you'll face ERCs typically ranging from 1-5% of the excess amount, depending on how many years remain in your fixed period. Some lenders offer fixed rate mortgages with higher overpayment allowances (15-20%) or even unlimited overpayments, though these may have slightly higher interest rates. Once your fixed rate period ends and you move to the Standard Variable Rate (SVR), you can usually overpay unlimited amounts without penalty.