How Mortgage Overpayments Are Calculated

ملخص

Overpaying your mortgage means paying more than your required monthly amount or making lump-sum payments to reduce the outstanding balance faster. This saves interest because mortgage interest is charged on the remaining principal — reduce the principal earlier and every subsequent month accrues less interest. The calculator compares the savings from overpaying against the alternative of investing that money at a given return rate.

كيف يعمل

Why overpayments save interest

Mortgage interest compounds on the outstanding balance. In the early years of a repayment mortgage, the majority of each monthly payment is interest. For example, on a £200,000 mortgage at 4.5% over 20 years, the month-1 payment of £1,265 includes £750 of interest and only £515 of principal.

An overpayment of £200 in month 1 effectively increases the principal reduction by nearly 40%. Because the balance is now lower, every subsequent month charges less interest and pays off more capital — a compounding benefit that cascades over the remaining term.

Month-by-month simulation

Unlike the basic mortgage formula, overpayment savings cannot be calculated with a closed-form equation. The calculator runs a month-by-month simulation:

1. Start with the current balance (minus any lump sum)
2. Each month: calculate interest on the remaining balance, apply the base payment plus overpayment
3. Track when the balance reaches zero — this is the new payoff date
4. Compare total interest paid with and without overpayments

The overpay-vs-invest comparison

Following the MoneySavingExpert methodology, the calculator compares two strategies over the same time horizon (the number of months until the mortgage is paid off with overpayments):

• Strategy A (Overpay): Mortgage is cleared early, no savings pot
• Strategy B (Invest): Pay only the contractual amount, invest the overpayment money at the specified return rate. At the overpayment payoff point, compare the investment pot against the remaining mortgage balance.

If the pot exceeds the remaining balance, investing wins (you could clear the mortgage and have money left over). If it falls short, overpaying wins.

The 10% annual limit

Most UK fixed-rate mortgages allow you to overpay up to 10% of the outstanding balance per year without incurring an Early Repayment Charge (ERC). This is an industry convention, not a legal requirement — check your mortgage offer for the exact terms. Tracker and SVR mortgages typically allow unlimited overpayments.

Early Repayment Charges (ERCs)

ERCs apply if you overpay beyond your annual allowance during a fixed-rate or tied-in period. They typically range from 1% to 5% of the outstanding balance, declining over the deal period:

ERCs do not apply after the introductory deal ends (when you move to SVR).

الصيغة

The investment comparison uses standard future value formulas:

Investment pot = lumpSum × (1 + i)ᵐ + monthlyOverpayment × [(1 + i)ᵐ − 1] / i

where i is the monthly investment return rate and m is the number of months until overpayment payoff.

مثال محلول

شرح المدخلات

• Current balance — the outstanding amount you owe on the mortgage today
• Annual interest rate — your current mortgage rate
• Remaining term — how many years are left on the mortgage
• Monthly overpayment — the extra amount you plan to pay each month on top of your contractual payment
• Lump sum — a one-off payment applied immediately to reduce the balance
• Investment return rate — the annual return you expect if you invest the overpayment money instead (used for the overpay-vs-invest comparison)

شرح المخرجات

• Interest saved — total interest avoided by overpaying
• Months/years saved — how much sooner you’ll be mortgage-free
• New payoff date — when the mortgage will be paid off with overpayments
• Month 1 savings — interest saved in the first month (shows immediate impact of lump sum)
• Year 1 savings — total interest saved across the first 12 months
• Investment pot — what you’d have if you invested the overpayment money at the specified return rate
• Remaining balance — what you’d still owe on the mortgage at the overpayment payoff point if you hadn’t overpaid
• Verdict — a plain-English comparison of whether overpaying or investing is better

الافتراضات والقيود

• The calculation assumes a fixed interest rate for the remaining term. Rate changes would alter the savings.
• Lump sums are applied at the start — the calculator does not model lump sums applied at a future date.
• The 10% ERC limit is not enforced by the calculator — it shows the total saving regardless of whether the overpayment exceeds your lender’s annual allowance.
• The investment comparison uses gross returns — it does not account for income tax on savings interest, capital gains tax, or the benefit of ISA wrappers. After-tax returns may be lower.
• Reduce term, not payment: The calculator assumes overpayments reduce the remaining term (the contractual monthly payment stays the same). This saves the most interest. If your lender reduces the payment instead, the savings will be lower.

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