A bonus, an inheritance, a work payout, or savings that have quietly built up. However it arrived, having a chunk of money and a mortgage is a good problem to have. The question most people ask next is: do I pay it off in one go, or overpay a bit each month?
The short answer is that a lump sum, paid sooner, saves the most interest. But it isn't always the right move, and regular overpayments have real advantages. Here's how to decide.
Three checks before you overpay at all
Other debts first. If you have credit cards, an overdraft or a loan, they almost certainly cost more than your mortgage. Clearing them first saves more. See overpay your mortgage or pay off debt first?
Keep an emergency fund. Money paid off a standard mortgage is hard to get back. Keep three to six months of essential spending somewhere you can reach it.
Compare with saving. If your savings rate after tax beats your mortgage rate, saving can win. See overpay your mortgage or save?
Why a lump sum saves more
Mortgage interest is worked out on what you still owe. Pay £12,000 off today and you stop paying interest on that £12,000 from today. Spread the same £12,000 over five years and most of it sits on your balance, collecting interest, for months or years before you pay it off.
So, for the same amount of money, sooner beats later.
A worked example
Sam has a £200,000 repayment mortgage over 25 years at 4.6%, paying about £1,123 a month. Sam has £12,000 to put towards it. Here's how three ways of using it compare, if the monthly payment stays the same and the term shortens:
Choice | Interest saved | Mortgage-free sooner by |
|---|---|---|
£12,000 lump sum now | about £23,600 | 2 years 7 months |
£200 a month for 5 years (£12,000 in total) | about £20,000 | 2 years 4 months |
£12,000 lump sum in 5 years, when the fixed deal ends | about £16,700 | 2 years 1 month |
The lump sum now wins, but the monthly route isn't far behind, and it keeps £12,000 in Sam's pocket while it's being paid. If Sam kept the £200 a month going for the whole mortgage, that would save about £37,400 and cut more than six years.
Try your own numbers, including a lump sum and a regular overpayment together, with the mortgage payoff calculator.
When regular overpayments make more sense
You don't have a lump sum. Most people don't. £50 or £100 a month still adds up over 20-odd years.
You want to keep a safety net. Overpaying from your monthly budget leaves your savings untouched.
Your income is uneven. Monthly overpayments can usually be stopped or changed at any time.
The lump sum would go over your allowance. Spreading it across years can keep you under the limit.
The 10% allowance and early repayment charges
Most fixed and tracker deals let you overpay up to 10% of your balance each year without a charge. Go over it and you may pay an early repayment charge, often 1% to 5% of the amount over the limit. On Sam's £200,000, that's up to £20,000 a year.
Every lender is different. Some count the allowance by calendar year, some by the anniversary of your deal, and some include your regular overpayments in it. Check with your lender before paying in a large sum. If your lump sum is bigger than the allowance, you could pay part now and the rest when the allowance resets or your deal ends.
Shorter term or lower payments?
After a lump sum, many lenders lower your monthly payment and keep the same end date, unless you ask them to keep the payment and shorten the term. Both are fine:
Shorter term: saves the most interest and gets you mortgage-free sooner.
Lower payment: frees up money each month, which helps if things are tight or you want to clear other debts.
Ask your lender which they'll do, and tell them which you want.
A simple plan for a lump sum
Clear any dearer debts.
Top up your emergency fund.
Check your overpayment allowance and whether your lender shortens the term or lowers the payment.
Pay the lump sum in, within the allowance, as soon as you've decided.
Consider a small regular overpayment too. Combined, they go further than either alone.
When to get help
If you're struggling with your mortgage payments or other bills, talk to your lender early. They must treat customers in financial difficulty fairly. Free, confidential advice is also available from StepChange, National Debtline and Citizens Advice. You'll find them on our financial resources page.
Examples assume a repayment mortgage at a fixed 4.6% for the whole term, interest calculated monthly, the same monthly payment kept after each overpayment, and overpayments within the lender's allowance. Your figures will differ. This guide is general information, not financial advice.