Mortgage overpayments can help you pay off your mortgage sooner and can significantly reduce the amount of interest you pay over the course of your loan. The amount you overpay goes towards repaying the mortgage itself, not on any interest you owe.
Research from Santander1 shows that if a borrower took out a £200,000 mortgage over a 25-year term, they could save £1,146 in interest (based on current rates) by making a monthly £10 overpayment, and they’d become mortgage-free four months earlier.
Those who can afford to make a £100 overpayment each month on a £200,000 mortgage could save £9,948 in interest and reduce their mortgage term by three years in the process. Those with a £500,000 mortgage making the same £100 overpayment could save over £10,000 in interest and become mortgage-free one year and five months earlier. A combination of paying off capital and the consequent reduction in interest, result in the time saving.
Whilst paying less interest and being mortgage free earlier can be attractive, it’s important not to overlook the need to keep some emergency savings set aside for unexpected bills and expenses.