Should you overpay your mortgage?

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.

What is a mortgage overpayment?

It’s when you arrange to pay more than the agreed monthly repayment due on your mortgage.

There are two types of overpayment:

  1. Regular monthly overpayment: This is where you pay a set amount extra each month e.g. €100, on top of your usual mortgage repayment.
  2. Lump sum: This is where you pay an amount as a once off, or on an adhoc basis.

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.

Why overpay on your mortgage?

Regularly overpaying, or paying a lump sum could help you:

  • Reduce the size of your mortgage, by paying off more of the interest and capital
  • Reduce the term of your mortgage, sometimes by quite a few years
  • Reduce your monthly repayments, if this option is available
  • Switch to a better mortgage deal, because your loan to value (LTV) will be smaller

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.

How much can you overpay?

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.

How to overpay on your mortgage

Firstly, you should double check the terms of your mortgage to make sure:

  • Your mortgage accepts overpayments
  • You can overpay without penalty
  • You won’t exceed the maximum annual overpayment allowed

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.

Regular overpayment

  • Set up a standing order for the extra amount you want to pay
  • Increase your monthly mortgage repayment to include the overpayment

Lump sum payment

  • Do an online payment - this may be capped at a certain amount
  • Set up a BACS payment - which can exceed the capped amount
  • Complete an overpayment request form for your lender to process

Confirm how the overpayment should be used

You should let your lender know how you want your overpayments to be used, for example:

  • Pay a lump sum to reduce your monthly repayments, over the same mortgage term
  • Pay a lump sum to reduce your mortgage term, and maintain your monthly repayments
  • Increase your current monthly repayments, to reduce your mortgage term

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.

How much could you save?

There are different factors that affect how much you could save, for example:

  • Interest rate
  • Mortgage balance
  • Remaining mortgage term
  • Lump sum or monthly overpayment amount
  • How the overpayment is used

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:

  1. How much interest you’ll save
  2. The number of years/months your term will reduce by

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.

Lump sum overpayment example

Mortgage balance €200,000
Interest rate 3%
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

Regular monthly overpayment example

Mortgage balance €200,000
Interest rate 3%
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.

When should you avoid overpaying?

Although overpaying can have clear benefits, it isn’t always the right thing to do, for example:

  • If there’s an early repayment charge: If you overpay on the wrong product, or at the wrong time, you could be charged thousands of euro in fees. Always make sure it’s free to overpay, or that the amount you’ll save far outweighs any penalty.
  • When you have high interest debts: If you’ve borrowed credit that’s costing you more in interest than your mortgage, you should clear this before you start overpaying.
  • When you have high interest savings: If your savings are earning a higher interest rate than your mortgage, or are tied up in a fixed term account, it’s better to leave them be. When the interest rate drops, or the money can be accessed for free, you could then look at using some of the funds to overpay.
  • If you’ll be left short in an emergency: Using all your savings on a lump sum overpayment could mean you having to borrow expensive credit to deal with an emergency. Always leave yourself a contingency of funds to deal with the unexpected.

So, should you 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.

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.

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Overpaying your mortgage FAQs

Can I borrow the money back when I overpay my mortgage?

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.

Can I reduce my mortgage balance by overpaying on an interest only mortgage?

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.

Does overpaying my mortgage reduce my monthly repayments?

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.

Should I overpay my mortgage or save the money?

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.

What is an early repayment charge?

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.

Warning: If you do not keep up your repayments you may lose your home. Warning: The cost of your monthly repayments may increase. Warning: You may have to pay charges if you pay off a fixed rate loan early. Warning: If you do not meet the repayments on your loan, your account will go into arrears. This may affect your credit rating, which may limit your ability to access credit in the future. Warning: The entire amount that you have borrowed will still be outstanding at the end of the interest-only period. The payment rates on this housing loan may be adjusted by the lender from time to time. (applies to variable rate loans only) Information provided and Interest rates quoted valid at 04/08/2021