Mortgage overpayments explained

A lot of people pay their mortgage like a bill: Something you have to do and you don’t think twice about it.

Many contracts allow you to overpay on your mortgage, which means you make extra payments outside the monthly repayment. In this post I explain why it makes sense to overpay.

Banks do not lend you money for free. You pay interest. A lot of it.
You will find a few calculation tools in this post. To make use of them, you need to know your own mortgage. How much did you deposit, borrow, what is your interest rate and how long is the term. This information is easy to find in your online mortgage account or on your last mortgage statement.

I will use the mortgage of our flat as example for the following calculations.

Property value: £216,000
Deposit: £21,000
Amount borrowed (this number includes the mortgage fees): £195,400
mortgage term: 20 years
interest (5 yr fix*): 2.44%

Assuming the interest rate stayed 2.44% for the full 20 years, we will pay £245,520 (not “just” £195,400), meaning the interest we paid amounts to £51,120. This is what we pay the lender/bank for lending us money.
Let’s assume we wanted to keep the monthly repayments low. We pay £1,029. We choose a mortgage term of 30 years, which reduces the monthly payments to £760.
In this scenario (again with stable interest rate), we would pay back £273,600, meaning the interest we paid amounts to £78,200. Your repayments are lower, but the extra 10 years mean you pay a lot more interest.
Here you find the link to a repayment calculator, so you can play around a bit with your own numbers.

When you make a repayment to the bank, in our case monthly £1,029, this sum consists of one part paying off the property and one part interest.

When you overpay money, you only pay off property.

This is really important to know. Every £ you choose to overpay, goes fully towards the amount borrowed. And by paying off the borrowed sum, you decrease the interest you pay.

Let’s go back to our examples and calculate a few scenarios, by help of this overpayment calculator:

In the first scenario – our family’s mortgage: When we consistently overpay £200 on our mortgage, we save £11,000 on interest and pay off our mortgage after 16 years (instead of 20). 4 years early.
In the scenario where we chose a term of 30 years, a regular overpayment of £200 means that we save almost £21,000 interest and pay off our mortgage in 21 years and 9 months.

But even just £50 overpayments will make a difference, have a play around with the calculator to see what different payments mean to the length and the interest you pay.

*There is a reason why we specifically wanted the 5 year contract (even though our broker strongly advised against it): Our child. I was pregnant when we bought the property. I knew that after the maternity leave the horrendous UK childcare costs would hit us. I did not want to the stress of finding a new mortgage while we are rather short on money (keyword affordability). After 5 years, he will already be in school and our cost will be lower, making it easier to get a new mortgage on best terms possible. Until then, we have a fixed cost we can calculate with. Always look at your own circumstances when you buy. Listen to the experts and then decide what is best for your situation.

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