Mortgage overpayments

The typical overpayment allowance on fixed mortgage products is currently 10 per cent. Some offer a little higher and others have no limit. While NatWest wouldn't be the first to have a 20 per cent overpayment allowance, I think it’s a welcomed change. Overpayments can help homeowners save money and potentially shave years off of their mortgage.

With the recent increases in interest rates, I expect more people may consider overpaying on their mortgages to reduce the overall interest payable.

However, overpayments aren’t for everyone. For example, clearing other debts with higher interest rates, setting aside an emergency fund and considering alternative options such as investments or pension contributions are all factors I’d personally consider before committing to a mortgage overpayment.

Normally, most lenders allow people to make overpayments of a maximum 10% of their outstanding balance every 12 months. This can be a good idea if you have savings not earning you enough — or anything at all in real terms given the current level of inflation — as by paying off large chunks of your mortgage you can save on the amount of interest you have to pay. Other lenders may follow suit but in the current climate where the cost of living is rising in so many areas, people may hold on to their savings instead of making overpayments. The focus should always be to pay off debt with the highest interest first.

Overpayments enable people to make monthly or one-off lump sum capital repayments to reduce the debt on their mortgage. This enables borrowers to save on interest payments by reducing their loan with the lender. A common overpayment cap is 10% of the remaining mortgage debt per annum, without incurring an early repayment charge. Of late, some lenders have come to market with enhanced products offering as much as 20% overpayments each year, enabling customers to pay off their loans quicker. Overpayments are definitely a great tool for people with a monthly income that fluctuates from month to month. However, in some cases it can be best for clients to retain savings for easy and quick access to capital, all the more so amid a cost of living crisis where costs are soaring. More lenders may follow suit, as this can be a decent feature.

Typically, lenders offer customers a 10% overpayment limit. Overpaying on a mortgage can be a sensible option if borrowers have surplus funds, as this can reduce the interest payable and overall cost of the loan. However, we would only recommend this if the borrower can afford to make the payment without a detrimental effect on their overall financial position, as the cost of living crisis continues to bite. In my opinion, offering borrowers more flexibility and higher overpayment options will be beneficial to both the borrower and lender in the long term.

Making overpayments on your mortgage is a very powerful way to get it paid off sooner and save a huge amount of interest over its lifetime. While many mortgages will allow you to overpay 10%, some 20% and some as much as you like each year, it is not just those with large lump sums of cash that can benefit. Many lenders will allow you to amend your direct debit payment, so even just rounding your repayment up from £857.62pm to £860pm will have an impact on your balance and get your mortgage paid off sooner.

Most lenders will let customers overpay their mortgage balance by up to 10% per year. However, some specialist mortgage lenders will not allow you to make any overpayments during a fixed rate period without incurring an early repayment charge. As a rule, if a customer has the monthly budget to do so, I would always recommend they overpay their mortgage. This will be dependent on a number of factors including if they have any unsecured debt which they may be paying higher rates of interest on and also ensuring that they have the right insurances in place in the event of death or serious illness. Increasing the limit on overpayments can only be a good thing for customers, especially those with smaller mortgage balances as this will hopefully enable them to pay down their mortgages sooner should they wish to.

NatWest's recent action is a visionary step and I expect it to set the tone for other lenders to follow suit. Already, Metro Bank and Digital Mortgages have similar measures by offering the option of 20% overpayments. This newfound flexibility offers numerous benefits, particularly for those with smaller mortgage commitments. By being able to keep the monthly payments low, individuals now have the choice to extend the term of their mortgage while still having the ability to make overpayments within their means. This is indeed a brilliant move that provides greater financial freedom and stability.

Natwest increasing its annual overpayment allowance to 20 per cent of the outstanding mortgage balance is great news. Overpaying, particularly with the much higher mortgage rates borrowers face, could save tens of thousands of pounds because it pays off the capital, shaving years off your mortgage term.

Alternatively, you can ask the lender to reduce your monthly payments and leave the term unchanged.

It's likely we'll see other lenders follow suit to remain competitive.

Typically the overpayment limit is 10%, I would recommend overpaying your mortgage if you have the surplus income to do so and want to either reduce your mortgage term (saving money on interest paid in the long run) or want to minimise your monthly repayments for the future. I would not recommend overpaying your mortgage if you do not have the income available to do so and overpaying will leave you with no savings, I think it’s a wiser idea to have savings for emergencies than overpaying your mortgage, because if you need those funds back you will have to remortgage to release the equity. I cannot see any reason why all lenders do not have their overpayment limit at 20% I think it’s a great idea to help those that have the funds now to save for the long term.

It's great news that another lender has increased the overpayment limit to 20% - they aren't the only lender offering this however any increase in the choice of lenders doing this is a positive.
Generally, the majority of lenders allow up to 10% of the current mortgage balance per annum in overpayments to assist lowering the debt outstanding.
As far as if other lenders will start to increase the overpayment limit this remains to be seen, I am unsure why Natwest has suddenly taken this view - when others made the move almost a decade ago!

Overpayment limits for fixed rates is typically 10%. Not enough is made of this. Think of a mortgage as a very large credit card bill. Is the objective to make the minimum payment or clear the debt as quickly as possible? Those who don't pay the minimum on their credit card are doing it because they don't want to pay unnecessary interest on their borrowing. This is the same. Why don't more borrowers know they can make overpayments and save substantial interest costs (and clear their mortgage sooner)? 10% is usually a sufficient limit particularly when mortgage repayments already take up most disposable income and bonuses are less, so opportunities to pay more than 10% per year are limited anyway but clearly offering the opportunity to pay more is better for any borrower.

The average overpayment limit is 10%, however, some lenders do have a higher limit. Natwest will become the first 'major' bank to offer this facility, which is great news for borrowers. Overpaying on your mortgage means you can save money on the total amount of interest you pay and potentially clear your mortgage balance quicker. You can either make a 'lump' sum overpayment, or make a 'monthly' overpayment, but you must not exceed the limit otherwise you will incur an early repayment charge.