How overpayments help
Every mortgage payment is split between interest and principal. An overpayment is extra money that goes straight off the principal, so the balance you are charged interest on falls faster. That is why a small regular overpayment can save tens of thousands of pounds in interest and cut years off your term.
This example uses a typical loan: £180,000 at 5% over 25 years. Without overpayments, your monthly payment is about £1,052 and you pay about £135,679 in total interest.
What a regular overpayment does
| Monthly overpayment | Interest saved | Mortgage cleared |
|---|---|---|
| £100 | £24,045 | 3y 10m earlier |
| £200 | £40,535 | 6y 8m earlier |
| £300 | £52,628 | 8y 9m earlier |
| £500 | £69,275 | 11y 9m earlier |
All figures for a £180,000 loan at 5% over 25 years, assuming the overpayment is made every month alongside the regular payment. Over 25 years, £100 a month totals £30,000 of extra payments — yet it saves about £24,045 of interest and clears the mortgage nearly 4 years sooner.
Why the interest rate matters
Overpaying is most powerful when your mortgage rate is high, because it stops expensive interest from compounding. Here is the effect of a £200 a month overpayment on a £180,000, 25-year loan at different rates:
| Mortgage rate | Interest saved | Mortgage cleared |
|---|---|---|
| 3% | £21,013 | 6y 4m earlier |
| 4% | £30,147 | 6y 7m earlier |
| 5% | £40,535 | 6y 8m earlier |
| 6% | £52,289 | 6y 10m earlier |
The term saved stays similar, but the interest saved rises sharply with the rate — from about £21,000 at 3% to over £52,000 at 6%. At higher rates, paying down the mortgage is usually a better guaranteed return than most savings accounts.
Overpaying the mortgage or saving instead?
The simple rule: compare your after-tax savings rate with your mortgage rate. If the mortgage rate is higher, overpaying usually wins because it is a guaranteed, tax-free return. If savings can beat your mortgage rate after tax, saving may make sense. Either way, keep an emergency fund before overpaying.
The 10% overpayment rule
Most UK lenders allow you to overpay up to 10% of the outstanding balance per year without an early-repayment charge. On a £180,000 loan, that is up to £18,000 a year (about £1,500 a month) penalty-free. Above that limit — especially during a fixed-rate deal — you may pay an early-repayment charge, so check your mortgage terms.
Does a lump sum work the same way?
A lump sum reduces the balance immediately and cuts interest from that point on, but it is a one-off. Regular monthly overpayments spread the benefit and keep the discipline. In the example above, a single £5,000 lump sum at the start saves about £3,769 of interest, while £100 a month saves about £24,045 — because it keeps reducing the balance over the whole term.