Overpaying your mortgage could save you thousands of euro in interest, and help pay off your balance years earlier. Here’s how to overpay and how much you could save.
It’s when you arrange to pay more than the agreed monthly repayment due on your mortgage.
There are two types of overpayment:
You can combine regular and lump sum overpayments, as long as they don’t exceed the maximum amount per year that your mortgage product allows.
Regularly overpaying, or paying a lump sum could help you:
You could also save more in interest than you’d earn if you put the funds in a savings account long term, if your mortgage interest rate is higher.
If you have a fixed rate mortgage or tracker mortgage, most lenders let you overpay 10% of the mortgage balance each year, but some may let you pay more, so check.
If you overpay more than you’re allowed, you’ll face a hefty early repayment charge (ERC).
If your current mortgage deal has ended and you’ve switched to the lender’s standard variable rate (SVR), you’re usually free to overpay as much as you like.
Staying on a SVR is very expensive, so you could make a lump sum overpayment and then switch to a better mortgage deal.
Firstly, you should double-check the terms of your mortgage to make sure:
You can go to your lender’s website to see what options there are for each type of overpayment. Some of the choices you may be given are shown below.
You should let your lender know how you want your overpayments to be used, for example:
You’ll need to think about your goals and how much you can afford to pay, to work out what’s right for you.
If you’re unclear on whether you can overpay penalty free, speak to your lender before going ahead.
There are different factors that affect how much you could save, for example:
The best way of seeing how overpaying can impact your mortgage balance and term is to use an overpayment calculator.
Simply fill out a few details about your mortgage and overpayment, and you’ll get an instant result that shows:
The calculator makes some assumptions about your mortgage, and can’t tell you if you’ll be charged an ERC, so it should only be used as a guide.
In the examples below, the same mortgage balance, remaining term, interest rate, and total overpayment amount have been used. This is to fairly compare the impact of paying a lump sum vs regular overpayments.
For the regular overpayment, the sum of €83.33 is equal to €20,000 over 20 years.
|Remaining mortgage term||20 years|
|Lump sum payment||€20,000|
|Amount saved in interest||€15,041.47|
|Mortgage term reduced by||2 years 7 months|
|Remaining mortgage term||20 years|
|Regular monthly overpayment||€83.33|
|Amount saved in interest||€6,635.73|
|Mortgage term reduced by||1 year 10 months|
Paying off a lump sum upfront has a much bigger effect on the amount of interest saved (more than double) and reduces the term by an extra 9 months.
Although overpaying can have clear benefits, it isn’t always the right thing to do, for example:
The budgeting tool on the MABS website, can help you work out your current outgoings, and see if you can afford to overpay on your mortgage.
If you’ve checked the terms of your mortgage and it’s safe to overpay, it’s definitely worth considering.
You’ll need to be sure you can afford the monthly overpayment, or lump sum, and not stretch yourself too far in case an unforeseen expense arises.
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You can’t usually get the money back, which is why it’s so important to only overpay what you can afford and keep a contingency for emergencies.
If you have a flexible mortgage, check the terms to see if you have the option to borrow back your overpayments.
When you make monthly repayments on an interest only mortgage, it’s only the interest that’s being paid off.
You should speak to your lender to see if there are any options to overpay and reduce your mortgage balance, rather than the interest.
You can opt to use your overpayments to reduce your repayments if you wish. It won’t necessarily happen automatically, so check with the lender.
Reducing your monthly repayments will mean your mortgage term stays the same, so if you want to reduce your term, you should maintain your payments.
If your mortgage rate is higher than any savings accounts available, it’s worth considering overpaying as it could save you more in interest than you’d earn.
If you can invest in the long term, there may be more options open to you that a financial advisor can advise you on.
Also known as an ERC, it’s a penalty you must pay the lender if you overpay too much of your mortgage at the wrong time, for example in the introductory period.