Overpaying your mortgage: what it really saves
The short answer
Overpaying a repayment mortgage saves you the interest on every pound you clear early, at your mortgage rate, with no tax to pay on the saving. On a £200,000 mortgage at 4.5% over 25 years, an extra £200 a month saves about £36,000 of interest and clears it six years early. It usually beats a savings account paying the same rate, as long as you keep enough cash aside for emergencies and stay within your lender's overpayment limit.
Why overpaying saves so much
Mortgage interest is charged on the balance you still owe. Each overpayment comes straight off that balance, so from then on you pay less interest every month, and more of each normal payment goes towards the loan itself. The effect builds over time, which is why overpaying early in a mortgage saves far more than the same amount near the end.
Worked example
A £200,000 repayment mortgage at 4.5% over 25 years costs £1,111.66 a month, and £133,499 in interest over its life. Here's what overpaying does, if the rate stayed the same throughout:
| Overpayment | Total interest | Interest saved | Paid off early by |
|---|---|---|---|
| None | £133,499 | — | — |
| £100 a month | £112,358 | £21,142 | 3 years 6 months |
| £200 a month | £97,219 | £36,280 | 6 years 1 month |
| £10,000 once, at the start | £114,199 | £19,300 | 2 years 2 months |
The lump sum assumes your monthly payment stays the same, so the mortgage ends sooner. Some lenders lower your monthly payment instead and keep the original end date. That saves less interest, so ask for the term to be shortened if that's what you want.
Overpaying or saving?
Overpaying earns you your mortgage rate, guaranteed and free of tax. A savings account has to beat that rate after tax to come out ahead.
Basic-rate taxpayers pay no tax on the first £1,000 of savings interest each year, and higher-rate taxpayers on the first £500. Above that, interest is taxed at your normal rate. So for a higher-rate taxpayer who has used their allowance, a savings account paying 4.5% is really paying 2.7%, well below a 4.5% mortgage. Interest inside a cash ISA isn't taxed, which narrows the gap. From April 2027 the tax on savings interest is due to rise by 4 percentage points, to 24%, 44% and 49% (announced, not yet law), which tips things further towards overpaying: at 44%, that 4.5% account pays 2.52% after tax.
The comparison changes when you remortgage. If your next deal is at a lower rate, overpaying saves less from that point on. But a smaller balance also means a lower loan-to-value, which can qualify you for a cheaper rate in the first place, and that's often the biggest gain of all.
Before you overpay
Keep an emergency fund. Money paid into your mortgage is hard to get back, so it's sensible to keep a few months' spending in easy-access savings before you overpay.
Check your overpayment limit. Most fixed and discounted deals limit how much you can overpay each year without an early repayment charge, often 10% of the balance. The charge can wipe out the saving, so check your mortgage offer or ask your lender.
Clear dearer debts first. Credit cards, car finance and personal loans usually charge more than a mortgage does.
Think about your pension. Pension contributions get tax relief, and often an employer contribution as well. For a higher-rate taxpayer, that usually beats the return from overpaying, though the money is locked away until at least 55 (57 from 2028).
Check how flexible your mortgage is. Some lenders let you take back overpayments later, or take a payment holiday because you're ahead. Others don't. It's worth knowing which yours is.
Common questions
Can I overpay an interest-only mortgage? Yes, if your lender allows it. Each overpayment reduces the balance, so the interest you pay each month falls straight away, and less is left to repay at the end of the term. With interest-only, there’s no shorter term to gain: the saving is lower monthly interest and a smaller final bill.
What about an offset mortgage? An offset mortgage links your savings to the mortgage, and you’re charged interest only on the difference. That gives much the same saving as overpaying by the amount you keep in savings, but you can still take the money out if you need it. Offset deals often carry a slightly higher rate, so compare the two.
Is it better to overpay monthly or in a lump sum? The sooner money comes off the balance, the more interest it saves, so a lump sum early on beats the same amount spread over years. In practice the choice usually comes down to your overpayment limit and keeping enough cash aside: regular monthly overpayments are easier to keep within a yearly limit and to stop if you need to.
Work it out with your own figures
See your repayments, total interest, and what overpaying would save on your own mortgage.
Open the Mortgage & Equity CalculatorNext step: see what saving the overpayment instead could grow to.