Why overpaying saves so much
Interest is charged on the balance you still owe. Every extra pound cuts the balance, so you pay less interest every month after. On a £250,000 mortgage at 4.5% over 25 years, overpaying £200 a month saves about £38,000 in interest and clears the loan about five years early.
The 10% overpayment limit
Most fixed and tracker deals let you overpay up to 10% of the balance each year without an early repayment charge. Above that, charges of 1% to 5% can apply. Variable rate (SVR) mortgages usually allow unlimited overpayments.
Overpay or save?
If your mortgage rate is higher than what savings pay after tax, overpaying usually wins. Keep an emergency fund first, because money paid into a mortgage is hard to get back.
Frequently asked questions
Is it worth overpaying my mortgage?
Often, yes. Overpaying gives a guaranteed return equal to your mortgage rate, with no tax to pay.
Should I reduce my term or my payment?
Reducing the term saves the most interest. Some lenders lower the monthly payment instead, so ask which they do.
How much can I overpay?
Usually 10% of the balance per year on fixed deals. Check your mortgage offer for the exact limit.
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