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Should you overpay on your mortgage? The pros and cons

The Bank of England has recently hiked the base rate to 5%, so you can get a good savings rate by shopping around.

But with average mortgage rates sitting at around 6%, it might be worth overpaying on your mortgage instead.

By overpaying on your mortgage, you could reduce your debt and save money that way.

You’d be making gains at the same rate as your mortgage.

So, if your mortgage rate is 6% (after the base rate rises), for example, that’s the equivalent of savings that would earn 6% in interest.  

It sounds like a win-win – but is it always the savvy move?

We look into the benefits and disadvantages of overpaying on your mortgage below.

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Benefits of overpaying on your mortgage 

Cut your debt AND your interest 

The most obvious plus-side of paying off more of your mortgage is that you’ll reduce your debt and bring yourself one step closer to living mortgage-free.

Learn more: should I pay off my mortgage or invest?

Perhaps what is less obvious is that you’ll bring down the amount of interest you pay, too. 

Say you have £150,000 left of a 20-year mortgage with a 6% rate.

If you overpay a lump sum of £15,000 (that’s 10%), you will pay off your mortgage two years and seven months early. Plus, you’d save £29,600 in interest.

Saving money by overpaying on your mortgage

You may be able to save some money by overpaying your mortgage compared to what you would get in interest from a savings account.

Let’s say you keep the £15,000 cash in an easy access savings account paying 4% interest. You’d earn £600 on it a year.

That makes the £29,600 in saved interest from overpaying the mortgage even more appealing. 

You could access better mortgage deals 

Overpaying your mortgage could help you cut your loan-to-value (LTV).

This is the proportion of your property price covered by your mortgage.

It goes down if your property value goes up and as you pay off more of your mortgage. That’s why overpaying can help bring it down. 

A good reason to bring down your LTV is that lenders use this figure to decide which deals they’ll offer you.

The lower your LTV, the lower the interest rates you can access. 

So overpaying on your mortgage could mean that you get an even cheaper deal when you come to remortgage. 

Disadvantages of overpaying on your mortgage 

You may be hit with fees 

Most fixed-rate mortgages come with an initial tie-in period, during which you can’t leave the deal without being penalised by a fee.

The same applies to if you overpay on your mortgage, meaning you could be ‘fined’.

These are called Early Repayment Charges (ERC), and they’re usually between 1% and 5% of the balance. 

If you’ve got a £150,000 mortgage, even 1% will sting you with a £1,500 ERC.

However, if you’ve got a £50,000 mortgage, 1% would only leave a £500 dent in your pocket, which may be worth it if you could cut down the balance and the interest by a significant amount. 

There is also usually some leeway. Most lenders will let you overpay by around 10% a year during the tie-in period, which you can do in chunks or monthly overpayments.

Don’t just take our word for it, though. Check your mortgage details before you overpay.  

You’ll lose access to the cash 

Wiping off your mortgage debt may be a big ambition, but it’s important that you always have some emergency cash available.

If the pandemic has shown us anything, it’s that you really can’t know what’s around the corner.

Generally, it’s a good idea to have three to six months’ pay (after tax) at hand, but ideally 12 months’ pay.

You could need it for all sorts of reasons, from unexpected house repairs to covering your living costs if you suddenly can’t work for any reason. 

However, this doesn’t necessarily apply if you have a flexible mortgage, like an offset or current account one.

These give you the option to borrow back money you’ve paid off, so you won’t be strapped for cash if you overpay.  

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Alternative options to overpaying on your mortgage 

There are other ways you could get around the current meagre interest rates.  

  • Take advantage of better savings rates – you can get easy access rates of over 4% and even higher if you opt for a fixed-rate account (although you won’t be able to access your money in this scenario). 

  • Pay off more expensive debt – your mortgage may be the biggest debt you have, but it might have a lower interest rate than other debts. Credit cards, unsecured loans and overdrafts can be much more expensive, and it’s generally advised to pay these off first. 

  • Top up pension pot – if you have spare cash, putting it into your pension pot could be sensible as you’ll get tax relief on it, and it will be invested to help it grow. There’s no limit on how much you can pay into your pension, but only up to 100% of your salary or £60,000 attracts tax relief. 

If you’re still unsure what to do, you should speak to a mortgage broker or an IFA.

They’ll give you a clear snapshot of your options and help you search out the best deals. 

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About the author
Kate has written for leading publications and blue chip companies over the last 20 years.