In this day and age many mortgages taken out have a fixed rate over an advantage period of 2, 3, 5, 7 or even 10 years.  During these advantage periods the vast majority of the mortgage products have penalties to pay if you redeem during this period, commonly referred to as early repayment charges.  A big benefit of many of these products is that they have an annual allowance that you can overpay without incurring a penalty, most frequently this is a 10% allowance.


With interest rates being low the effective cost to borrow money is relatively cheap at the moment, especially when you think of the astronomical interest rates of old.  However making overpayments on your mortgage can give you significant savings on interest and reduce your mortgage term by months or even years.


Using an overpayment facility can save you money this is extra effective when you consider the interest rates available for cash savers and deposit accounts.  Many savings rates are currently under 2% per annum, with the only ones above this being accounts you are fixed in to for 3 or 5 years limiting your flexibility.


Not only could making overpayments save you money in interest it could be beneficial when you come to the end of your advantage period.  Lenders offer mortgage products at different loan to value brackets, i.e. up to 60% or 75% just to list a couple so you get an idea.  When coming to remortgage we frequently see people somewhere in the middle of a tier, for example 81% and even small overpayments over your advantage period could possibly bring you beneath the next tier.


Overpayments aren’t for everyone, you need to have sufficient disposable income to be able to afford the overpayments.  If you have other more expensive debts that you are paying a higher interest rate on it should be prioritised in the shorter term.  Additionally having a rainy day savings pot, somewhere between 3 – 6 months income, is useful so you have funds to meet those unexpected costs which crop up from time to time.


Daniel Brown BSc (Hons), DipPFS, Cert SMP

20th January 2020

Is It Worth Overpaying On Your Mortgage?