How mortgage overpayments work, with worked examples

Paying a bit more than you have to on a repayment mortgage is one of the few ways an ordinary household can save thousands of pounds of interest without taking any investment risk. The reason is simple: extra money goes straight against the amount you owe, so you pay interest on a smaller balance for the rest of the term. But the rules matter. Many fixed-rate deals limit how much you can overpay each year before an early repayment charge applies, and overpaying is not always the best use of spare cash. This guide explains how the mechanism works, gives a full worked example with a monthly overpayment and a lump sum, and sets out what to check with your lender before you start.

By Valtrinity. Updated 18 October 2026.

What an overpayment does

On a repayment mortgage each monthly payment has two parts. One part pays that month's interest, and the rest reduces the capital, which is the amount you borrowed. In the early years most of the payment is interest. An overpayment is any amount on top of the required payment, and it goes entirely against the capital, as long as your lender applies it that way.

A lower balance means less interest the next month, which means more of your normal payment goes against capital the month after. The effect builds on itself, in the same way that compound interest works in your favour on savings.

Most lenders let you choose between two results: keep your monthly payment the same and finish the mortgage sooner, or lower the monthly payment and keep the end date. Reducing the term usually saves more interest, so it is worth asking how your lender handles it.

A baseline example

Take a mortgage of £200,000 over 25 years at 5 per cent, with interest worked out monthly on the balance. The monthly payment is about £1,169.18. Over 300 months you pay £350,754 in total, so the interest is £150,754.

These figures are an illustration. Real mortgages vary, since lenders may calculate interest daily, rates change when a deal ends, and fees may be added. Treat the example as a way to understand the scale, and use your own lender's figures for a decision.

After two years, the balance is about £191,541. You have put in about £28,060 over those 24 months and reduced the debt by only about £8,459, because most of what you put in went on interest.

Example 1: £200 extra every month

Now suppose you pay £200 a month more, so £1,369.18 in all, from the start. With the same 5 per cent rate, the mortgage is cleared after 226 months, which is 18 years and 10 months, instead of 25 years. That is 4 years and 2 months sooner.

The total interest falls to about £108,911, compared with £150,754 for the standard route. The saving is about £41,843, from an extra £200 a month that adds up to a total of £45,200 of extra payments. In other words, £45,200 of overpayment saves £41,843 of interest and shortens the term by more than four years.

The earlier you start, the more each pound saves. The same overpayment made in the last five years of the term would save far less, because the balance, and so the interest, is already small.

Example 2: a single lump sum

Suppose you receive a bonus or an inheritance and put £10,000 against the mortgage at the start, keeping the original monthly payment of £1,169.18. The balance falls to £190,000, and the mortgage ends after 272 months, which is 22 years and 8 months, about 2 years and 4 months early.

Total interest is about £127,869, a saving of £22,885 on the £10,000. That is more than double the amount you put in, because the money works for the whole term.

The same lump sum put in at year 10 would save far less, since fewer years of interest are left to avoid. If you can only overpay once, the sooner it happens the better.

Limits and charges to check first

Most fixed-rate and tracker deals allow overpayments of up to 10 per cent of the outstanding balance each year without charge. On a £200,000 balance, that is £20,000 a year. Pay more than the allowance in the deal period, and an early repayment charge, often a percentage of the amount overpaid, usually applies. The allowance and the charges are in your offer documents and are worth checking.

Some lenders calculate the allowance on the balance at the start of the deal, some on the balance at the start of each year, and some set it as a flat amount. Ask whether you can pay monthly, as a lump sum, or both, and whether the overpayment is applied immediately or at the end of the year. Immediate application saves more interest.

Once your deal ends and you move to a new rate, you may be able to overpay without limit for a while, such as when you are on the lender's standard variable rate. Do not stay on that rate for long to take advantage of it, because it is often higher than a fresh deal.

When overpaying is and is not the best choice

Before you overpay, make sure you have an emergency fund that covers a few months of costs, because it is far easier to put money into a mortgage than to get it back out. Money put in cannot normally be withdrawn, though some offset and flexible mortgages are an exception.

Compare the mortgage rate with what you could earn. If your mortgage costs 5 per cent and a savings account pays 4 per cent before tax, the overpayment gives a better guaranteed return, because mortgage interest is not taxed while savings interest above your allowance is. Debts with higher rates, such as credit cards at over 20 per cent, should normally be cleared first.

Think about your pension too. If your employer matches your pension contributions, that extra money is usually worth more than the interest saved on the mortgage. If you are saving into a pension, check that you are receiving all the employer contributions available before overpaying.

How to start

Contact your lender or check your online account for the overpayment options. Set up a standing order for the extra amount, and make sure it is labelled as an overpayment so that it is applied to the capital instead of treated as an advance on future payments.

Check the statements after the first month or two to confirm the balance is falling as expected. Review the amount each year, particularly when your deal ends or your income changes.

Rates change, and the example above assumed 5 per cent throughout. If your rate goes down, the saving is smaller, and if it goes up, the saving is larger. Either way, an overpayment still reduces your debt by the amount you pay, and that is a certain return.

Tools mentioned in this guide

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