At the start of February 2025, the Bank of England (BoE) cut the interest base rate. If you have a variable- or tracker-rate mortgage, it could mean your repayments will go down. While that’s likely to be welcome news, you might want to consider overpaying your mortgage – it could save you thousands of pounds over the full mortgage term.
As well as saving money, overpaying your mortgage could mean the debt is paid off sooner. For many families, being mortgage-free is a milestone they’re looking forward to that could provide greater financial freedom and take a weight off their shoulders.
So, read on to find out why you might want to consider overpaying your mortgage.
Overpayments reduce the balance of your mortgage
If you have a repayment mortgage, your regular monthly repayments will cover the interest accrued and a portion will be used to reduce the debt.
As a result, a large proportion of your repayments could be going towards the interest, especially if you have a long mortgage term.
For example, if you borrow £150,000 through a repayment mortgage with a 25-year term and an interest rate of 4.5%, your monthly repayment would be £833 and you’d pay £9,996 over a year.
Yet, during the first year of your mortgage, your mortgage debt would reduce by just £3,325 because most of your repayment is covering the accrued interest.
As your outstanding mortgage balance falls, the amount of interest added slowly declines and a larger portion of your repayments will go towards reducing the debt.
In contrast, when you make a mortgage overpayment, this will reduce the outstanding balance. So, it can be an effective way to reduce your mortgage term and means that less interest is accrued.
Even small regular mortgage overpayments could save you thousands of pounds
According to Santander calculations from January 2025, overpaying your mortgage by the equivalent cost of just a few pints a week could save you thousands of pounds.
With the average pint of larger now costing £4.81, just three pints a week can add up to £57 a month.
The research shows that if you had a 25-year repayment mortgage of £200,000 with an interest rate of 4.5%, and you overpaid by £57 each month, you’d save £12,983 in interest alone. What’s more, you’d be mortgage-free two years and one month earlier than planned.
If you increase the regular amount you were overpaying, the benefits are even larger. In the same scenario, if you overpaid by £144 a month, the cost of around 30 pints, you’d save more than £28,000 and take four years and eight months off your mortgage term.
So, even small but regular overpayments have the potential to save you thousands of pounds when you look at the effect of them over the long term.
As well as making regular overpayments, you might choose to pay off a lump sum too.
Let’s say you have a £150,000 repayment mortgage and 15 years left on the term with a 4.5% interest rate. If you used a £15,000 lump sum as an overpayment, you’d save more than £13,000 in interest alone over the full mortgage term. You’d also be mortgage-free two years earlier than expected.
So, next time you receive a bonus or you’re deciding where to save a lump sum, you might want to consider using it to overpay your mortgage.
You might also choose to combine regular and lump sum overpayments to reduce your mortgage debt as quickly as you can.
Check if you could face an early repayment charge
Before you make regular or one-off mortgage overpayments, be sure to check your mortgage agreement.
If you have a mortgage deal in place, you could face an early repayment charge (ERC). Usually, you can pay up to 10% of the outstanding mortgage balance as an overpayment each year without an ERC applying. However, this isn’t always the case, so checking your mortgage terms could help you avoid an unexpected fee.
Contact our team to talk about your mortgage
As well as overpaying, taking out a new mortgage with a more competitive interest rate could also help save you money in the short and long term. If you’d like to talk to our team about your mortgage options, please get in touch.
Please note:
This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.