Mortgage overpayments: how they work (and the 10% rule)
Overpaying your mortgage cuts the term and total interest — but watch the annual overpayment limit. Here’s how it works and when it’s worth it.
Overpaying is the most powerful lever most people have on their mortgage — but there’s a limit worth knowing before you send a lump sum.
Why it saves so much
Interest is charged on what you still owe. An overpayment reduces that balance immediately, so every future month’s interest is smaller — the saving compounds across the whole remaining term, and the mortgage clears sooner.
The 10% rule
Overpay or save?
As a rule of thumb: if your mortgage rate is higher than what you’d earn (after tax) on savings, overpaying usually wins. But first keep an accessible emergency fund — money overpaid is hard to get back. And ask your lender whether an overpayment shortens the term (saves the most interest) or lowers future payments.
In short
Overpayments cut capital, so they shorten the term and save interest that compounds over time. Most lenders allow up to 10% a year without penalty — check your terms, keep an emergency fund first, and weigh overpaying against savings rates.
Frequently asked questions
How much can I overpay without a penalty?
Most fixed-rate mortgages allow overpayments of up to 10% of the outstanding balance per year without an early repayment charge. The exact limit is in your mortgage terms — check before making a large overpayment.
Is it better to overpay the mortgage or save?
Roughly: if your mortgage rate is higher than the interest you’d earn on savings (after tax), overpaying usually wins financially. But keep an accessible emergency fund first — money overpaid into a mortgage is hard to get back.
Should I reduce the term or the monthly payment?
When you overpay, ask your lender whether it shortens the term (more interest saved) or lowers future payments (more monthly flexibility). Reducing the term usually saves the most interest overall.
Sources & last checked
- Should you pay off your mortgage early? — MoneyHelper (Money & Pensions Service)
Last checked against official sources: 9 July 2026.