Overpaying a mortgage is one of the few guaranteed returns in personal finance: every extra pound or dollar saves you interest at your mortgage rate. Here's how much it actually saves, and when it isn't the best move.
Why overpaying works
Mortgage interest is charged on the outstanding balance. Pay down the balance faster and every future month's interest is smaller. Early in a mortgage, most of each payment is interest, which is why early overpayments have the biggest effect.
The maths
The standard monthly payment:
M = P × r(1 + r)^n / ((1 + r)^n − 1)
- P = loan amount, r = monthly rate, n = number of months
My Mortgage Calculator shows the full amortisation schedule. To model an overpayment, reduce the balance and recalculate. For a lump sum, subtract it from the balance at that month. For regular overpayments, add them to each month's principal.
Illustrative example
£250,000 over 25 years at 4.5% (illustrative):
| Scenario | Monthly payment | Approx. total interest | Term |
|---|---|---|---|
| No overpayment | ~£1,390 | ~£167,000 | 25 years |
| +£200/month | ~£1,590 | substantially less | several years shorter |
Run your own numbers. The savings depend heavily on rate and timing, so I've avoided quoting precise figures here that won't match your loan.
Reduce term or reduce payment?
After an overpayment, lenders may:
- Keep the payment the same and shorten the term, which saves the most interest
- Keep the term and lower the payment, which improves monthly cash flow
Ask your lender which applies, and whether you can choose.
Early repayment charges (ERCs)
- UK: fixed and tracker deals often allow a percentage of the balance per year penalty-free; beyond that, ERCs apply.
- US: most modern conforming mortgages don't have prepayment penalties, but check your loan documents.
- Canada: prepayment privileges vary. My Canada Mortgage calculator helps with the base payment.
Overpay or invest?
| Overpay | Invest |
|---|---|
| Guaranteed "return" = mortgage rate | Expected return may be higher, not guaranteed |
| Reduces risk and debt | Keeps money accessible (sometimes) |
| Money is locked in the house | Market risk |
Common order of priorities: emergency fund → employer pension/401(k) match → high-interest debt → then overpay vs invest depending on rate and risk appetite. Compare growth using my Compound Interest calculator.