Last Updated on 19 August 2026
Paying off your mortgage early can potentially save you thousands of pounds in interest and free up monthly cash flow. But the decision to overpay your mortgage is about more than just the maths. Your attitude towards debt, your risk profile, and your longer-term goals will impact your decision. For some, the peace of mind that comes with being mortgage-free outweighs earning a better return from their money elsewhere. Even small regular overpayments can make a significant difference over the life of a mortgage, but there are potential charges and trade-offs to understand before you decide. This article covers how mortgage overpayments work, the opportunity cost of other options, and how to decide whether overpaying is the right choice for your circumstances.
What is the maths of paying more off your mortgage?
From a purely financial aspect, deciding whether to overpay your mortgage depends on your mortgage interest rate and the rate of return the extra money could earn elsewhere, such as investing in the stock market.
When interest rates are low, the potential interest savings made from overpaying your mortgage are not that big. If you are considering making additional payments on your mortgage, you should compare your mortgage interest rate against the financial returns offered by alternative opportunities. If the interest rate on your mortgage is low, you may be financially worse off overpaying compared with saving or investing the extra money elsewhere. This is called opportunity cost, and is the return you give up when you choose one use of money over another.
An example with low mortgage interest rates
For example, your mortgage has an interest rate of 3.5%, and you anticipate investment returns of 8%. Assuming you have an extra £200 a month you can pay off your mortgage, this would save you £46 in interest over the year. If you invest the same amount in the stock market, you would make a return of £106 for the year. You will forego £60 if you choose to pay the extra amount into your mortgage rather than investing it, which is the opportunity cost of this decision.
Should I pay extra off my mortgage when interest rates are high?
When mortgage interest rates are high, the opposite is true and making extra mortgage payments is often the better option. Paying extra can significantly reduce the impact of compound interest and save you thousands of pounds in interest. For example, if mortgage interest rates are 7.5% and savings interest is 4%, paying extra on your mortgage is the better option when there is an interest difference of 3.5%. While you may get a better return investing in the stock market, investing carries risk and does not guarantee a specified return. In this example, paying an extra £200 a month into your mortgage would save you around £100 in interest, while saving the money would generate approximately £53 of interest over a year.
Worked example of paying off your mortgage over 20 or 25 years
| Mortgage of £200,000 at 5% | Option 1: 25-year mortgage | Option 2: 20-year mortgage |
|---|---|---|
| Monthly repayment | £1,169.18 | £1,319.91 |
| Total mortgage payments | £350,754 | £316,778 |
| Mortgage interest paid | £150,754 | £116,778 |
| Interest saved | £33,975 |
| Cash flows | Option 1 | Option 2 |
|---|---|---|
| Mortgage payments | £350,754 | £316,778 |
| Investment contributions | £45,219 | £79,195 |
| Total | £395,973 | £395,973 |
| Investments – cash flows | Option 1 | Option 2 |
|---|---|---|
| £150.73 invested for 25 years | £45,219 | |
| £1,319.91 invested for 5 years | £79,195 | |
| Final value of deposits @ 8% return | £144,304 | £97,629 |
In this example, increasing the monthly mortgage payment by £150.73 to £1,319.91 settles the mortgage 5 years earlier with interest savings of £33,975.
How the options compare
For a meaningful comparison, we should assume that the £150.73 is available for both options 1 and 2. Not overpaying the mortgage in option 1 leaves £150.73 a month to invest or save. Investing this amount in the stock market each month, where it earns an average of 8% per year, means it will be worth around £144,304 after 25 years. We also need to assess the investment return for option 2. Once the mortgage is paid off, £1,319.91 is available to invest in the stock market. Again, assuming an 8% return, £1,319.91 invested monthly for 5 years returns around £97,629.
In summary, after 25 years, option 1 returns around £144,304 while option 2 returns around £97,629. Both options have cash outflows of £395,973. On paper, option 1 is the better choice, returning £46,675 more than option 2, but financial decisions are rarely that straightforward. The psychological value of owning your home outright may be more important to you. Your long-term goals will play a major part in your financial decisions; for example, you may want to start your own business in the future, with paying off your mortgage as part of your strategy in working towards that goal.
Tax implications of investments
These examples do not consider any tax implications and assume that all investment contributions are made using a tax-free stocks and shares ISA. ISAs have a combined annual contribution limit of £20,000 across all types. Investments held outside an ISA may generate dividend or capital gains tax on the returns, impacting the investment return figures and the overall calculations.
More figures with different mortgage interest rates & investment returns
The tables below use the same parameters as the earlier example. The first uses a 7% mortgage interest rate with a 7.5% investment return, the second a 7.5% mortgage rate with a 6% investment return. When a lower return on investments is anticipated, paying more off the mortgage is the better option.
| Interest rate of 7%/ ROI 7.5% | Option 1 – 25 years | Option 2 – 20 years |
|---|---|---|
| Monthly payment | £1,413.56 | £1,550.60 |
| Total mortgage payments | £424,068 | £372,144 |
| Investment contributions | £41,112 | £93,036 |
| Total cash outflow | £465,180 | £465,180 |
| Interest saving | £51,924 | |
| Final value of return | £120,971 | £113,163 |
| Interest rate of 7.5%/ ROI 6% | Option 1 – 25 years | Option 2 – 20 years |
|---|---|---|
| Monthly payment | £1,477.98 | £1,611.19 |
| Total mortgage payments | £443,395 | £386,685 |
| Investment contributions | £39,961 | £96,671 |
| Total cash outflow | £483,356 | £483,356 |
| Interest saving | £56,710 | |
| Final value of return | £92,771 | £112,975 |
These examples illustrate that if your expected investment return is higher than your mortgage interest rate, investing the extra cash monthly is the better option. When your mortgage rate is higher than investment or savings returns, paying more and clearing your mortgage sooner yields better financial gains. If the two rates are equal, it makes no financial difference, and the decision comes down to risk, flexibility and how you feel about the debt. Mortgage savings are guaranteed, but investment returns aren’t, so you need a decent margin above the mortgage interest rate to compensate for the inherent investment risk.
Unfortunately, real life isn’t this straightforward, as mortgage interest rates, investment and savings returns do fluctuate. This makes regular financial checks important to ensure your money is working hard and efficiently for you.
How do mortgage overpayments work?
Most UK mortgage lenders let you overpay by up to 10% of your outstanding mortgage balance per year without penalties. The balance is usually based on the mortgage opening balance at the beginning of the year. The extra money from overpayments goes towards reducing the mortgage’s capital balance, which in turn reduces the monthly interest charge. This means that every month, an ever-increasing amount of your repayment is allocated to reducing the capital balance, while the interest decreases month on month.
When you make one-off or regular overpayments on your mortgage, your lender may reduce the monthly payment. You need to ensure you continue paying the higher payment to benefit from interest savings on the mortgage.
It is important to check your mortgage terms before overpaying, so that you aren’t charged early repayment or redemption penalties. The overpayment limit varies by lender and mortgage type. Fixed-rate mortgages usually have stricter limits and higher penalties during the fixed-term period. When you take out a mortgage, this is one of the key areas of your mortgage terms and conditions you should check. This is important for making overpayments, and if you are considering changing mortgage providers in the future.
How do early repayment charges and redemption penalties work?
An early repayment charge is a fee your lender may apply if you repay more of your mortgage than your mortgage terms permit. If you pay off the mortgage in full and your mortgage terms do not allow this, you may be charged an early redemption penalty. For example, you pay off your mortgage in full during the fixed term period.
Early repayment charges are usually calculated as a percentage of the outstanding mortgage balance. The fees are often between 1% and 5%, reducing the closer you get to the end of any fixed period. For example, a five-year fixed-rate mortgage may charge early repayment fees of 5% in year one, dropping to 4% in year two, and so on.
Early repayment charges can be a significant amount of money, so before making large overpayments or moving mortgage providers, it’s vital to check and calculate the fees. On a £200,000 mortgage, a 3% early repayment charge amounts to £6,000. If your mortgage has a fixed-rate period, once this ends and you move onto your lender’s standard variable rate, the early repayment charges typically no longer apply, and you can often overpay or redeem freely.
Should I overpay my mortgage or build an emergency fund first?
It is important to have around three to six months of living expenses in an easily accessible savings account before you consider making overpayments on your mortgage. This is because once money goes into your mortgage as an overpayment, you can’t easily get it back out. An emergency fund will cover any unforeseen expenses, such as buying a new washing machine, without needing to resort to expensive borrowing or using a credit card. If you have expensive outstanding debt, such as a personal loan or credit card debt, you should clear this before overpaying on your mortgage.
Strategies for reducing mortgage interest
- Pay more than the minimum payment every month, as this has a big impact when interest rates are high.
- Make sure your mortgage allows overpayments and has low or no redemption penalties.
- Having a larger deposit may help you get a lower interest rate on a mortgage. Mortgage lenders view borrowers with bigger deposits as less risky.
- Take a shorter term on the mortgage, for example, 20 years rather than 25 years.
- If you have a fixed-rate mortgage, shop around for more competitive deals once your fixed period ends.
- Consider an offset mortgage, where your savings are offset against the mortgage balance.
- Rent a room scheme – you can make up to £7,500 a year tax-free from renting out a furnished spare room in your home. This can help towards the running costs of your home. Income above the £7,500 threshold is taxable and must be declared on an annual tax return. If someone else also receives a share of the letting income, you each get a £3,750 allowance.
What are the benefits of an offset mortgage?
An offset mortgage reduces the interest you pay on your mortgage while keeping your savings accessible. With an offset mortgage, your savings are held in an account that is linked to your mortgage. Your savings are deducted from the mortgage balance before interest is calculated. This reduces the interest charged on the balance of your mortgage and is an effective way to reduce the length of your mortgage.
For example, if you have £20,000 in savings and an outstanding mortgage balance of £170,000, you will only pay interest on the net balance of £150,000. Your monthly repayment stays the same, but more of the payment goes to reducing the capital balance of the mortgage. The linked savings account doesn’t earn any interest.
What impact will a larger deposit have on the mortgage interest?
You may be able to secure a lower interest rate with a bigger deposit, saving interest over the mortgage term. The example below illustrates the impact of an additional £10,000 deposit. The calculations assume a house price of £200,000, a 25-year mortgage, and that £20,000 is available for the deposit in both options. This example assumes an investment return of 8%. In option 1, the savings of £10,000 from having a smaller deposit are invested as a lump sum. For option 2, the monthly savings from the reduced mortgage payment (£110.22) are invested on a monthly basis. After 25 years, the £10,000 lump sum is worth £73,402 while the monthly contribution of £110.22 has grown to £105,521.
| Based on a house price of £200,000 | Option 1 | Option 2 |
|---|---|---|
| Mortgage and rate | £190,000 – 5% | £180,000 – 4.5% |
| Deposit | £10,000 | £20,000 |
| Monthly payment | £1,110.72 | £1,000.50 |
| Total payments | £333,216 | £300,150 |
| Total interest | £143,216 | £120,150 |
| Interest saving | £23,066 | |
| Final value of returns @ 8% | £73,402 | £105,521 |
| Cash Outflows | Option 1 | Option 2 |
|---|---|---|
| Deposit | £10,000 | £20,000 |
| Mortgage payments | £333,216 | £300,150 |
| Investment payments | £10,000 | £33,066 |
| TOTAL cash outflow | £353,216 | £353,216 |
Both options have identical cash flows but very different investment returns. By putting down a larger deposit, option 2 generates an additional £32,119 in wealth over 25 years. This may look like it contradicts the earlier examples, where an 8% investment return beat a 5% mortgage. The difference is that the extra £10,000 does two jobs at once. It reduces the amount you borrow, and it moves the mortgage into a lower loan-to-value band, so the lender charges a lower rate on the entire £180,000, not just on the extra £10,000 you put down.
That is why the monthly payment falls by £110.22, far more than borrowing £10,000 less would achieve on its own. Over the 25-year term, that £110.22 a month adds up to £33,066 — more than three times the £10,000 you put in, and that is before any investment growth. Invested at 8%, it grows to £105,521, compared with £73,402 if you had simply invested the £10,000 as a lump sum instead.
In conclusion
Both examples highlight the importance of calculating the opportunity cost of alternative options and the various factors to consider. Ultimately, your choice will depend on the figures, alternative investment returns, your longer-term goals and your risk attitude. Remember, it is important to have an emergency fund before you consider making mortgage overpayments. Make sure you check your mortgage terms allow overpayments. Be mindful that interest and savings rates can change, while investment returns are not guaranteed. Stock market investments can go up and down, and any investment in the markets must be for the longer term.
Other resources:
Rent a room in your home: The Rent a Room Scheme – GOV.UK
You’ll find a MORTGAGE OVERPAYMENT VS INVESTMENT spreadsheet in our shop that lets you effortlessly run the figures for up to 4 scenarios.
Disclaimer: This article is for general information only and does not constitute personal financial or mortgage advice. The examples and calculations used are for illustrative purposes only and may not reflect your individual circumstances. Investment returns are calculated assuming monthly compounding at the stated annual rate. Actual investment returns will vary and are not guaranteed. Mortgage products, interest rates, overpayment allowances, and early repayment charges vary by lender. Always check the terms of your specific mortgage before making overpayments or switching products. If you are unsure which approach is right for your situation, consider seeking advice from a qualified mortgage adviser or independent financial adviser. Moneyquids is not regulated by the Financial Conduct Authority (FCA) and does not provide regulated financial advice.