Mortgage brokers warn that too few borrowers are taking advantage of mortgage overpayments, a strategy that can significantly reduce the long-term cost of what is most people's largest debt. One broker called overpayments an "underused strategy," while a lender noted that "even modest overpayments can save an owner thousands over the life of the mortgage." However, brokers and lenders alike stress that overpayments may not be appropriate for everyone.
How Mortgage Overpayments Work
Lenders typically allow borrowers to overpay up to 10% of their mortgage balance each year, though in some cases it can be as much as 20%. When borrowers make overpayments, most lenders offer the choice of having lower monthly repayments moving forward or shortening the mortgage term. The flexibility allows homeowners to tailor their repayment strategy to their financial goals.
Jamie Elvin, director at Strive Mortgages, said: "Making mortgage overpayments can be one of the simplest ways to reduce the total interest you pay over the life of your mortgage and, in many cases, shave years off the term. Even relatively small, regular overpayments can make a meaningful difference over time."
But while making overpayments can deliver financial benefits for many borrowers, Asis Tewari, co-founder at smart mortgage app nume, said "the problem is that almost no one is helping them think about it properly."
Underused Strategy with Big Potential
Ben Perks, managing director of Stourbridge-based Orchard Financial Advisers, described the mortgage overpayment as "an underused strategy." He added: "Overpayments kick the backside out of mortgages, potentially knocking years off the mortgage term and saving borrowers thousands in interest."
The problem, according to Tracey Dixon, owner of Cardiff-based Pure Mortgage and Protection, is often a lack of understanding as to how overpayments can be made and the level they can be. She continued: "Many borrowers don't realise that overpaying doesn't have to mean paying hundreds of pounds extra each month. Even a small regular overpayment can reduce the overall interest paid and, in many cases, shorten the mortgage term."
Dixon emphasised that before making overpayments, borrowers should check that their mortgage allows penalty-free overpayments and ensure they have an emergency fund in place. "The industry as a whole should do more to generate greater awareness of overpayments. Many people are surprised by the impact that even an additional £50 per month can make over the life of their mortgage," she said.
Not Suitable for Everyone
Ross Lacey, director of Rayleigh-based Fairview Financial Management, agreed that overpayments were not suitable for everyone. He said: "For some people, it can make sense, but there are definitely situations where it doesn't. We have clients who still benefit from mortgage rates starting with a 'one'. For them, the money that they could overpay is often better placed sitting in a savings account earning three or four times that."
Lacey noted that higher-rate taxpayers with savings accounts earning 4.5% only get about 2.5% after tax, making overpaying a mortgage at 4.5% a "slam dunk victory." However, he cautioned that keeping a certain amount in liquid cash is important, as it's not easy to pull money back out after overpaying a mortgage. This has led to increased interest in offset mortgages.
Martin Rayner, financial adviser at Compton Financial Services, said that in his experience, most borrowers were not making regular mortgage overpayments. He added: "The bigger question, though, is whether overpaying is the best use of your spare money. I do not automatically recommend it. We compare it against pensions and other investments first. Paying down a 4% mortgage gives you a guaranteed 4% return, but many higher earners can achieve a much better outcome through pension contributions."
Rayner explained that a higher-rate taxpayer can receive 66% effective tax relief, while someone caught in the £100,000 to £125,140 personal allowance trap can receive effective relief of up to 150%. "Put simply, £40 of take-home pay can become £100 in a pension. Mortgage overpayments are a fantastic tool in the right circumstances, but they should be weighed against pensions, ISAs and other financial priorities," he said.
Industry Data and Adviser Insights
Peter Dockar, chief commercial officer at lender Gen H, said: "Our own data shows around 6%–7% of Gen H accounts make an overpayment in any given month, which is in keeping with the industry average. This includes recurring overpayments of smaller amounts of a couple of hundred pounds per month and one-time lump sums from owner inheritances or gifts, which are typically £100,000+."
Dockar noted that even modest overpayments can save an owner thousands over the life of the mortgage, but deciding to overpay isn't always an obvious choice. Overpayments provide a guaranteed, tax-free return equal to the mortgage rate and reduce the loan-to-value (LTV) faster, which can secure much cheaper rates at remortgage. However, borrowers may be able to earn more with high-return savings accounts or by investing in their pensions.
Richard Davidson, mortgage advisor at onlinemortgageadvisor.co.uk, said: "From what we see, only a small minority of borrowers overpay regularly, but that share climbs noticeably as people get within sight of the end of their term and the finish line comes into view. Plenty like the principle of overpaying, yet actually managing your mortgage month to month is easier said than done, and that is where most of the opportunity quietly gets missed."
Davidson encouraged clients to look at small, regular overpayments but added the caveat that overpaying always has to be weighed against the opportunity cost of saving or investing instead. "The education people actually need is about making that choice for themselves rather than simply being told to overpay," he said.
Practical Tips for Borrowers
Scott Taylor-Barr, principal adviser at Leicester-based Barnsdale Financial Management, said "many people mistakenly think that overpayments have to be lump sums, so are surprised when I tell them that most lenders will allow them to amend their monthly direct debit." He added: "So rather than pay your lender £856.89 per month, just ask them to increase that to £860, or £900, as even those quite modest overpayments will make a difference to your mortgage term and, ultimately, the total amount of interest you pay."
Taylor-Barr highlighted that the vast majority of lenders charge interest daily, so making regular overpayments is more effective than saving up and then paying the same amount as a lump sum. Borrowers should first check whether their lender applies any early repayment charges and ensure they have a healthy emergency fund before committing extra money to their mortgage. Overpaying isn't always the right choice if you're carrying more expensive debt or may need access to those funds in the near future.
