Choosing a mortgage product that allows you to make overpayments can help you own a property outright sooner than you otherwise might. As well as giving you that security and peace of mind, it should also save you money on interest, as it shortens the length of the borrowing period.
And once you’ve paid off your mortgage and don’t have the ongoing financial commitment of monthly repayments (which are likely to be one of your biggest regular outgoings), you have the freedom to make more choices. For instance, you might want to:
- Work less or retire early
- Have a career change and do a dream job that might not pay as well
- Keep working but spend more on holidays and going out
Overpaying is particularly convenient for and popular with people whose income fluctuates, for example, those who:
- Are freelance/self-employed and have additional income some months
- Have salary incentives and receive bonuses
- Have investments that give periodic returns
But is overpaying and clearing mortgage debt right for everyone?
Not necessarily. The first thing to think about is your cash reserves and accessible savings. Putting extra earnings and other income into paying off your mortgage means that money is no longer available to you (unless you remortgage) and it is a good idea to keep some funds at hand in case of an emergency or your employment situation changes.
Secondly, bear in mind that mortgages are still one of the cheapest ways to borrow money, so if you have any other debt with a higher interest rate – for instance, a personal loan, car finance or a credit card balance – it may be better to clear that first.
And if you’re a landlord, leveraging the bank’s money via a mortgage is a simple way of increasing capital returns. When the property rises in value, you get to keep all that equity (less any tax owed), benefiting from the growth on the borrowed money as well as your own invested funds. According to the English Private Landlord Survey 2024, more than half of all landlords have some level of mortgage, with that figure rising to 75% of landlords with five or more properties.
On the other hand, not having a monthly mortgage payment will greatly boost rental income for landlords – although it’s advisable to speak to a property tax specialist to ensure that you mitigate your tax liabilities and keep hold of as much of that extra profit as possible.
How can I make overpayments?
If you want the flexibility of having the option to overpay without it being a requirement, speak to your broker or directly to your lender. Although some lenders will let you pay as much extra as you like, whenever you want, many mortgage products have a limit on how much you are allowed to overpay before you incur charges – commonly this is 10% of the outstanding balance per year. Mortgage lenders make their money by lending over a long period of time and collecting interest on the loan - they’re not in the business of making it easier for you to clear your debt sooner!
The other way to ‘overpay’ is to reduce the term of your mortgage. If your goal is to pay less in interest and save as much money as possible overall, arranging a new deal for the loan to be spread over fewer years may be the better option. However, it’s important to understand that this means you’re committing to making higher payments every month, which is less flexible and a greater financial risk than simply having the choice to overpay when it suits.
If you’d like to discuss how you might be able to overpay on your current mortgage deal, or talk through other options for paying off your mortgage sooner, our team of brokers is here to help. Get in touch with us via online chat, by completing our enquiry form or by calling 0800 144 4744.
