Should you Overpay your Mortgage? 5 Things you Need to Consider First

When you get it right, overpaying your mortgage can save you thousands of pounds in interest and see you owning your home outright faster than you expected.

However, it’s not always the best option and it may not be right for you and your financial/personal circumstances.

This guide will underline five things that you need to consider before overpaying your mortgage to help you decide whether it’s the best option.

What other debts to you have?

Mortgages are a long-term, low-interest finance facility, so your mortgage may not be top priority if you want to put some money towards debt repayment. 

If you have a large credit card balance or a personal loan, for example, then you may want to clear these first. This is because the interest on these types of loans is likely to be much higher than your mortgage rate. As a general rule of thumb, you should always clear the most expensive debts first as this will save you the most money.

So you should prioritise overpaying your mortgage when it’s either your only debt, or if your other debts are lower interest or interest-free, for example a 0% credit card.

Will you be charged for overpaying?

If you’re still in your mortgage introductory period (usually fixed rate), you are usually allowed to overpay by 10% of the mortgage balance each year, fee-free. However, this is not the case for all lenders, so you will need to check your mortgage terms.

However, if this is the case and you want to overpay by more than 10%, you may be charged a fee for doing so. This will be charged as a percentage (typically 1% to 5%) of the amount over the 10%.

For example, if you have a mortgage of £200,000 and you wanted to pay off £25,000, you may be charged a fee on £5,000.

The reason lenders charge for overpaying is because they would have already budgeted how much interest they will earn from your facility, and you paying off chunks of the mortgage will mean you’ll clear the loan faster and they will earn less in the long run.

If you are on a tracker mortgage, however, or you have surpassed the introductory period and are on the lenders standard variable rate then you should be able to overpay as much as you want without being charged.

Do you have an emergency fund?

If you don’t have an emergency fund in the bank but you either start to earn more money or come into a lump sum, you may want to prioritise saving over paying off your mortgage.

Not having any savings in the bank might force you to take out expensive loans and credit cards if you ever get into financial difficultly or an unexpected cost comes up.

You also won’t be able to get your money back if you put it into your mortgage, so you won’t be able to change your mind once the payment has been made.

What are you earning on savings?

Interest rates are particularly low right now, so you’ll probably find that the savings you’ll make on interest by overpaying your mortgage will be more than the interest you’ll earn by keeping more money in the bank.

However, you should check first that your savings really are in the best account they can be and that you’re earning the maximum amount of interest you can.

Doing this will make sure you know exactly what’s on offer and what your options are before making a decision on what’s the best long-term solution.

Do you have any other investments?

As mortgages are a low-interest facility, you may find it more beneficial to put lump sums into other investments.

For example, you could give your pension pot a boost (or start your pension if you haven’t already), or you could put the money into stocks, shares, or an investment property.