Overpaments & Offsets

With mortgage interest rates higher than they have been for some time, many people in the position to do so are considering overpayments on their mortgage. Mortgage overpayments represent any amount above the minimum payment. The minimum payment is primarily determined by the mortgage balance, interest rate and mortgage term. On a fixed rate mortgage, the payment remains the same for the duration of the fixed rate; on a variable rate mortgage, the payment goes up and down in line with the underlying benchmark. Overpayments allow you to pay off your mortgage faster, therefore paying less interest in the process.

Overpayments are not to be confused with overpaying. Overpayments directly reduce the mortgage balance as opposed to paying over the odds on your mortgage. Depending on the type of mortgage you have, overpayments can be limited or unlimited.

On fixed rate mortgages, overpayments are typically limited to 10% of the outstanding mortgage balance per year. For example, on a £250,000 mortgage, the maximum overpayment would be £25,000 in the first year. Any overpayments in excess of 10% of the outstanding mortgage balance would trigger early repayments charges (ERCs) on the additional amount. The charge is a percentage of the outstanding balance. The percentage is detailed in the mortgage offer and typically decreases the further into the mortgage you are. Some lenders do allow overpayments above 10% of the outstanding mortgage balance per year. However, this is not common.

On variable rate mortgage, specifically tracker and discount rates, criteria around overpayments varies. These types of products generally offer a lot more flexibility regarding overpayments. Unlimited overpayments are available on some tracker rate mortgages and the majority of discount rate mortgages. Unlimited overpayments can be particularly useful if you’re looking to significantly reduce or clear your mortgage in the near future.

Mortgage affordability, how much a lender will allow you to borrow, is often affected by the mortgage term. Borrowers can find themselves in a situation where they can afford the monthly payments over a specific term, however the lender will only allow them to borrow the amount required over a longer term. In this situation, taking the mortgage over the longer term and making overpayments can be the solution. Once an overpayment has been made, this money cannot be directly returned if it’s needed at a later date. Therefore, it advisable to only make overpayments within your means and from funds you will not be dependent upon in the future.

If you’re in a position to make significant overpayments on your mortgage, an offset mortgage could be appropriate for you. An offset mortgage allows you to “offset” your savings balance against your mortgage balance, with mortgage interest only being charged on the difference. An offset mortgage can be a more suitable option than making overpayments as the cash in your savings account is still available if required. For more information on overpayments, offsets or any other mortgage and life insurance queries, we’re here to help with free professional advice.