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Written for UK mortgages. In the US, extra payments usually shorten the loan. Lowering the monthly payment instead is called a recast, and you have to ask your lender for it. Fees and conditions vary by lender.
A mortgage overpayment can reduce the term or the monthly payment. On a £200,000 mortgage at 4.5% over 25 years, a £10,000 overpayment after two years saves £16,893.80 of interest and ends the mortgage two years sooner if you keep the payment. If you lower the payment instead, it drops from £1,111.66 to £1,053.44 a month and the interest saved is £6,069.67. These are our calculator's numbers for these terms. Your lender's schedule may differ.
The same £10,000, two outcomes
When you overpay, most lenders ask what the money should do. There are two answers:
- Cut the term. You keep paying the same amount each month, and the mortgage ends earlier.
- Lower the payment. The end date stays where it was, and each payment gets smaller.
Both take the same amount off your balance on the day you pay. What differs is how long the rest of the balance keeps costing you interest.
Take a repayment mortgage of £200,000 at 4.5% over 25 years, first payment in February 2027. Two years in, right after the 24th payment, you pay £10,000 extra.
| No overpayment | Cut the term | Lower the payment | |
|---|---|---|---|
| Monthly payment | £1,111.66 | £1,111.66 | £1,053.44 |
| Last payment | January 2052 | January 2050 | January 2052 |
| Mortgage ends sooner by | no change | 2 years | no change |
| Interest saved | none | £16,893.80 | £6,069.67 |
Without the overpayment, the interest over the whole term is £133,500.69.
Does overpaying a mortgage reduce interest?
In this example, yes, both ways. Interest is charged on what you still owe, and after the overpayment you owe £10,000 less. How lenders work that out, payment by payment, is in how loan interest is calculated.
The term option saves more because you keep paying £1,111.66 a month. The balance falls faster, the last two years of payments never happen, and neither does the interest for those years. With the lower payment the mortgage still runs to January 2052. The balance is smaller, but it keeps costing interest for the full 25 years, which is why the saving is smaller too.
People also ask whether to overpay the mortgage or reduce the term formally, through the lender. For the interest it makes no difference, as long as the same extra money goes in. The difference is in who decides: an overpayment you can stop, and a shorter contractual term means a higher payment every month until the end. MoneySavingExpert makes the same point.
How it went for me
I took out my own loan blind. I did not really understand how it would all go. Then I built up some savings and paid off a small part of the loan. Before that I read everything and asked the bank to cut the term: it saves more interest, and the table above shows why. The bank did the opposite and lowered the payment.
I was lucky. Paying got easier, and every month there is a little more left to live on. Today I would probably choose the same, even though it saves less interest. That is my case, not a rule.
When the lower payment is the point
A lower payment can matter more than the extra £10,824.13 of interest the shorter term would save. Some situations where that is true:
- your budget is tight, and £58.22 a month makes a difference
- your fixed rate ends soon, and you want the monthly cost down before the new rate kicks in
And if there is little in reserve, I would think about both an emergency fund and a lower payment. The fund helps when something happens, and the lower payment leaves a bit of air in the budget every month. That is how it went for me, though I never chose it.
Should I overpay my mortgage?
It depends on what else the money could do. Money in your house is hard to get back, so MoneyHelper, the UK's government-backed guidance service, says to check three things before you overpay:
- You keep an emergency fund in easy-access savings.
- You have no more expensive debt, such as credit cards, to clear first.
- Your savings would not earn more after tax than your mortgage costs.
If one of these fails, overpaying may not be the best use of the money, however good the interest saving looks.
Overpay the mortgage or save?
That is the third check in practice. Put the rate easy-access savings would pay you after tax next to the rate you pay on the mortgage, and the higher one wins on paper. MoneySavingExpert says the same: if the mortgage rate is around the same as your savings rate or higher, overpaying makes sense.
Today I might not have paid off part of the loan at all, and put the money into a fund or shares instead, hoping to earn more than the rate on the loan. But that is a risk. I am going to build another mobile app soon, where you will be able to work out which is better: paying off part of the loan, all of it, or investing the money elsewhere. A link to it will appear here later.
Why we show both outcomes before you choose
I had read everything and knew the term option saves more. What living with a lower payment is like, I found out only after the bank decided for me. I would have liked to see both answers side by side, in money and years, before talking to the bank. So the overpayment screen in Path to Zero puts both outcomes of the same overpayment side by side before you decide, "Cut the term" next to "Lower the payment", with the payment and the interest for each. In rare cases, with a very small overpayment, the lower payment costs more interest over the term than no overpayment at all. The app shows you the difference.
If a friend were choosing a mortgage today, I would tell them one thing: go to three to five lenders, put each one's terms into the calculator and compare the offers in pairs. The app sets two calculations side by side, and that part is in Pro. I went in blind at the start. This way you at least see what you are getting into.
Before you pay: check with your lender
My rate is variable, and overpaying was simple, with no complicated sums. With a fixed rate it seems harder, so I would ask the lender in advance. Three things to settle before the money goes:
- How much you can overpay without a fee. Many fixed-rate and tracker deals allow up to 10% of the balance a year, and above that an early repayment charge may apply. The app does not check your limit or the fee. Your mortgage offer has both.
- What the lender does by default. Some reduce the payment unless you ask them to reduce the term. Say which one you want.
- When the change applies. Ask when the new payment starts, or what the revised final payment date will be.
Questions people ask
Is it worth overpaying a mortgage?
In interest alone, yes in this example: £16,893.80 if you keep the payment, £6,069.67 if you lower it. Whether it is worth it for you comes down to the three checks above and to the fee-free limit on your deal.
Why do they say not to pay off your mortgage?
Because the money may do more elsewhere. The usual reasons are the three checks above: no emergency fund yet, dearer debt such as credit cards, or savings that would earn more after tax than the mortgage costs. None of them says the overpayment is wrong, only that it comes after those.
What happens if I pay an extra £200 a month on my mortgage?
You do not need a lump sum. On the £200,000 mortgage above, £200 extra a month starting with the 24th payment, two years in, ends it 5 years and 5 months sooner and saves £30,433.55 of interest. In Path to Zero the "Your move" slider shows this kind of regular extra amount on your own mortgage. It shows the effect only. The app records one-off overpayments, each with its own date and amount, and does not store a monthly plan.
How do you cut 10 years off a mortgage?
On the same 25-year mortgage, £419 extra every month from the first payment ends it 10 years sooner, in January 2042, and saves £58,154.64 of interest.
See both outcomes for your own mortgage. Describe your loan in Path to
Zero, add an overpayment, and see your debt-free date for each option before
you tell your lender.
