Should You Pay Off Your Mortgage Early?

There's no single right answer, but there is a simple starting rule: if your mortgage interest rate is the same as or higher than the best savings rate you could get elsewhere, overpaying usually works in your favour. If a savings account or your pension would earn you more, your spare money may do more good there.

Before you commit a lump sum or set up regular overpayments, it's worth checking a few things first, since the right answer depends on your own rate, how much flexibility your deal allows, and what else that money could be doing for you.

Three Ways to Pay Off Your Mortgage Early

There are three main ways to pay off your mortgage ahead of schedule:

• Regular overpayments. If you can comfortably stretch to paying more each month, most lenders will let you raise your Direct Debit, or you can set up a separate standing order alongside it. These aren't binding, so you can scale them back or cancel them at any time if your circumstances change.
• A lump sum payment. Rather than committing to a higher monthly payment, you can make a one-off payment, or occasional payments, by bank transfer whenever you have spare cash available.
• Shortening your mortgage term. Asking your lender to reduce your remaining term raises your monthly payment but cuts the total interest you'll pay over the life of the loan.

We've covered the practical side of setting each of these up, including how to approach your lender and which option suits different situations, in our guide on how to overpay your mortgage.

The Simple Rule: Compare Your Mortgage Rate to Your Savings Rate

Compare your current mortgage rate with the best easy-access or fixed savings rate you can actually get, not the rate you're currently earning if it's lower. If your mortgage costs more than your savings earn, overpaying effectively gives you a guaranteed, tax-free return equal to your mortgage rate. If your savings rate is higher, especially once you account for any tax on the interest, keeping the money saved may work out better.

The Benefits of Overpaying

Overpaying your mortgage, in whichever form suits you, can bring some real advantages:

• Lower interest costs. Keeping a smaller balance than scheduled reduces the total interest charged over the life of the mortgage.
• A shorter mortgage term. Overpaying accelerates your repayment schedule, which matters even more if rates look likely to rise during your term.
• A lower loan-to-value ratio. Paying down your balance faster improves your LTV sooner, which can put you in a stronger position for competitive rates if you remortgage.
• A return that usually beats savings. Mortgage interest rates are typically higher than standard savings rates, so clearing mortgage debt faster often works out ahead of leaving the same money in an ordinary savings account.

Check These Three Things Before You Overpay

• Clear more expensive debts first. Credit cards, personal loans and other unsecured borrowing almost always cost more in interest than your mortgage, so pay these down before you overpay.
• Confirm your penalty-free overpayment limit. Most fixed and discounted mortgage deals let you overpay up to 10% of the balance each year without charge. Go over that and you could face an Early Repayment Charge, typically 1% to 5% of the excess amount.
• Keep an emergency fund. Once money goes into your mortgage, you generally can't get it back without remortgaging or selling. Most advisers suggest keeping three to six months of expenses in easy-access savings before you overpay anything.

Timing can matter too, since some lenders calculate interest daily while others do it annually, which affects when in the year an overpayment saves you the most. For guidance on the Early Repayment Charges side specifically, see our guide to ERC timing when remortgaging.

Other Priorities That Might Beat Overpaying

Overpaying isn't always the best use of spare money. A few things commonly compete for the same pound:

• Pension contributions, which come with tax relief and often an employer match, can outperform the saving from overpaying your mortgage, particularly over a longer time horizon.
• Life cover or income protection, if you have dependants and don't yet have adequate cover, since it's relatively inexpensive and protects against a far bigger risk than mortgage interest.
• A Stocks and Shares ISA or other investment, if you're comfortable with investment risk and have a long time horizon, since historically this has the potential to outperform the interest saved by overpaying, though returns are never guaranteed.

Worked Example: What Overpaying Could Save You

The table below is an illustrative example only, based on a £200,000 mortgage at a 5% interest rate with 25 years remaining. Your own savings will depend on your balance, your rate and how long you have left, so treat this as a guide to the shape of the saving rather than your own figures.

Both examples assume no other overpayments are made and that the mortgage rate stays constant throughout, which is unlikely over a 20+ year term. Speak to an adviser for a calculation based on your actual balance, rate and term.

If You’re on a Fixed Rate, Check Your Early Repayment Charges First

If you're on a fixed-rate deal, check your mortgage offer document or ask your lender for your exact penalty-free overpayment allowance before sending any lump sum. Most fixed deals allow up to 10% of the outstanding balance per year, but this varies by lender and product. Overpaying beyond that threshold can trigger an Early Repayment Charge, which is often avoidable simply by spreading the same amount across two tax years instead of paying it all at once. For more on how fixed deals work more broadly, see our guide to the pros and cons of fixed-rate mortgages, and if your deal is coming to an end soon, our article on what happens at the end of a fixed-rate mortgage term covers your options.

Trackers and Flexible Mortgages: The Exceptions

Tracker and standard variable rate mortgages are usually more forgiving, often with no penalty-free limit at all, though it's still worth checking your specific terms. Our guide on whether to leave your tracker mortgage covers the wider trade-offs if you're considering a change.

Flexible and offset mortgages are the real exception to the “once it’s paid in, it’s gone” rule. With an offset mortgage, your savings sit alongside your mortgage and reduce the interest you're charged, while remaining accessible if you need them. See our guide to offset mortgages and our overview of flexible mortgages for how these work in practice.

Work Out Your Own Numbers

A precise answer for your own situation depends on three figures: your current mortgage interest rate, whether you're on a fixed or variable deal and how long is left on it, and whether you have any Early Repayment Charges or overpayment caps in place.

With those three details, one of our advisers can map out exactly which route saves you the most money, rather than relying on a generic example like the one above. You can also get a feel for the numbers yourself using our mortgage term calculator. Call us on 0191 580 9890 or message us on WhatsApp to talk it through.

The above blog has information contained within which was correct at the time of publication but is subject to change.