Should I Overpay My Mortgage Or Invest The Money?

A mortgage overpayment is when you pay more towards your mortgage than what was specified under the terms of your mortgage agreement.

Your lender sets the minimum amount you must pay back each month, but you might be able to pay off more depending on your agreement.

For example:

• You have a £300,000 mortgage at 5% with 25 years remaining
• Paying off a £10,000 lump sum reduces the interest by £23,940
• This means you’d repay your mortgage 22 months earlier

Overpaying your mortgage increases the equity you own in your property which means you’ll have a lower loan-to-value (LTV) ratio.

This means that the proportion of your home that’s covered by the mortgage gets smaller.

Typically, you can make a mortgage overpayment in the following ways:
a one-off lump sum: putting a chunk of cash towards the mortgage in one go

• regular overpayments: increasing your overpayments by a certain amount each month, for example, paying £900 instead of £800
• occasional overpayments: paying off lump sums now and again
• a combination: using a mixture of all the overpayment methods.

The amount you can overpay your mortgage depends on the terms of your mortgage.

The rules vary a lot between mortgage products and between different lenders.

Some lenders allow you to make unlimited withdrawals while others might have a maximum limit of 10% per year.

It’s also worth noting that you could be charged a penalty fee if you overpay your allowed limit.

Some of the benefits and drawbacks of mortgage overpayments include:

Reasons to use

• Becoming mortgage-free quicker
• Could reduce the cost of your mortgage payments
• You might qualify for a lower rate if your remortgage

Reasons to avoid

• You might need to pay early repayment charges
• You might lose returns from saving or investing

The short answer is it depends on your circumstances and financial goals.

Generally speaking, investments and pension contributions can generate returns.

While overpaying your mortgage might provide more peace of mind.

A really good way to compare the financial benefits of each is to use a calculator.

We have a free mortgage overpayment calculator which might be able to help you weigh up the financial pros and cons of each option which we’ll link in the show notes.

Speaking with a professional financial advisor could offer tailored insight into the best option for you and whether it’s aligned with your longer-term financial goals.

Overpaying your mortgage can help you build up equity in your home faster and could save you money in the long run.

However, it’s important to check whether your provider allows you to make overpayments without paying a penalty.

Using a mortgage overpayment calculator can also help to identify whether saving or investing your money might generate better financial returns in the long term.