How it works
The normal monthly payment is worked out for the remaining term. Each month interest is added at the annual rate ÷ 12, then the normal payment plus the overpayment is taken off until the balance is cleared.
A worked example
Overpaying £100 a month on £200,000 at 4.5% over 25 years clears it 42 months sooner and saves about £21,142 of interest.
What to keep in mind
Assumes a fixed rate for the whole term, monthly interest and the same overpayment every month. Many fixed-rate deals allow overpayments of up to 10% of the balance a year without an early repayment charge; check your mortgage terms.
How overpaying a mortgage saves money
Interest is charged on the outstanding balance. Every extra pound you pay reduces the balance straight away, so each later month’s interest is smaller and more of your normal payment goes towards the loan itself.
Worked examples
On a £200,000 mortgage at 4.5% with 25 years left, the normal payment is about £1,111.66 a month. Overpaying £100 a month clears it 3 years 6 months sooner and saves about £21,142. Overpaying £200 a month clears it 6 years 1 month sooner and saves about £36,280.
Overpayment limits and charges
Most fixed and tracker deals let you overpay up to 10% of the balance each year without an early repayment charge. Going over the limit can trigger a charge of 1% to 5% of the excess, so check your mortgage offer.
Overpaying or saving?
If your savings rate after tax is lower than your mortgage rate, overpaying usually saves more. Keep an emergency fund first, because overpayments are hard to get back.
Frequently asked questions
How much will I save by overpaying £100 a month?
On £200,000 at 4.5% over 25 years, about £21,142 of interest, and you would be mortgage-free 42 months sooner.
Is it better to reduce my term or my payment?
Reducing the term saves the most interest. Some lenders reduce your monthly payment instead after an overpayment; ask your lender how they apply it.
How much can I overpay without a penalty?
Usually up to 10% of the outstanding balance each year, but check your own mortgage terms.
For general information and planning, not personalised financial or tax advice. Verify important decisions with a qualified adviser.