Mortgage Overpayment Calculator

What an extra hundred a month actually buys

Overpaying a mortgage is the rare bit of personal finance where the mechanism is simple and the effect is enormous.

Every extra amount you send goes straight at the balance. A smaller balance means less interest charged next month, which means more of your normal payment goes at the balance too, which means the balance falls faster again. It compounds in your favour instead of the lender's.

The trouble is that the size of the effect is impossible to guess. An extra 100 a month on a 250,000 mortgage sounds like it might shave a few months off. It takes off nearly three years and saves over 25,000. Nobody arrives at that by intuition, which is exactly why this calculator exists.

Put in what you owe, your rate, the years remaining and what you can spare each month, and it shows you the two futures side by side.

Five boxes

1. Current Mortgage Balance. What you owe right now, not what you originally borrowed. It is on your latest statement.
2. Annual Interest Rate. Your current rate as a percentage.
3. Mortgage Term. The years you have left to run, not the original term.
4. Regular Monthly Overpayment. What you intend to add on top of your normal payment, every month.
5. Currency. Pounds, euros or dollars, purely for how the results are labelled.

Those first three want your position today rather than your position at the start. If you took out 300,000 over 25 years and you are four years in with 265,000 left, the numbers to enter are 265,000 and 21 years. Enter the original figures and you get a valid answer to a question about a mortgage you no longer have.

The output is a table with two columns, with and without overpayments, and the last two rows give you the headline: interest saved and time saved.

Shorter term or smaller payment, and why it matters

When you start overpaying, your lender will ask you to choose one of two things, and the choice is worth more than most people realise.

Reduce the term. Your monthly payment stays where it is, and the mortgage finishes earlier. Every overpayment permanently removes debt.

Reduce the payment. The finish date stays where it is, and your required monthly payment falls to reflect the smaller balance.

The second one feels like a reward and quietly gives most of the benefit back. Your payment drops, so the following month you are paying less, so less goes at the principal, and the compounding you just set in motion is partly undone.

This calculator models the first. It holds your total outgoing steady at your normal payment plus your overpayment, and reports the earlier finish date that results. That is deliberate, because reducing the term is where the real saving is, and it is the option most guidance points people toward.

Worth knowing because on many mortgages the payment reduction is the default. If you want the term reduction, say so, in writing, and check your next statement shows what you expected.

How the calculator finds the new finish date

There is no formula for this one. It simulates.

First it works out your ordinary monthly payment from the balance, rate and remaining term, using the standard amortising relation. Then it adds your overpayment to get a single total that leaves your account each month.

Then it walks forward, one month at a time:

1. Charge interest on the balance for that month.
2. Take that interest out of the total payment. Everything left over comes off the balance.
3. If the balance is now cleared, stop and count the months.

The loop runs until the balance reaches zero, trimming the final payment so the mortgage closes exactly rather than overshooting. The interest column is summed as it goes, so the total interest figure in the results comes from the actual simulated months rather than an estimate.

It has to work this way because you cannot rearrange the mortgage equation to answer "how many months until zero" once the payment no longer matches the schedule. So it just plays the mortgage forward and watches when it ends.

A 250,000 balance at 5 percent

Balance 250,000, rate 5 percent, 25 years remaining. The ordinary payment is 1,461.48, and left alone the mortgage costs 188,442.53 in interest.

Now add an overpayment:

Look at the first row. A hundred a month, which is a takeaway and a couple of coffees, buys you almost three years of freedom and 25,381 you never hand over.

Now look at the relationship between the rows. Going from 100 to 200 does not double the saving, it nearly does, but going from 200 to 500 does not multiply it by two and a half either. The returns bend because each overpayment is fighting a smaller and smaller remaining balance. The first extra pound works hardest.

Also worth noticing: the 500 row clears a 25 year mortgage in just over 15. The interest saved, 81,204, is more than five and a half years of the original payment. That is the whole argument for overpaying, in one number.

Why the same money is worth more now than later

An overpayment does not just remove that amount from your balance. It removes every future month of interest that amount would have generated.

So a hundred paid off with twenty years to run stops accruing interest for twenty years. The identical hundred paid off with two years to run stops accruing for two. Same money, wildly different effect, and it is the reason overpaying early beats overpaying more.

This has a practical consequence that runs against instinct. People often plan to start overpaying once things are comfortable, in a few years, when the salary is better. The arithmetic says a smaller amount starting now generally beats a larger amount starting later.

It also explains why the results table moves so much for such modest inputs. You are not saving your overpayment. You are saving your overpayment plus every month of compound interest it would have carried.

The 10 percent rule, and the charge behind it

Before you set up a standing order, there is one thing to check with your lender, and it is the thing this calculator cannot see.

In the UK, most fixed rate deals cap how much you can overpay in a year without penalty. The common figure is 10 percent of the outstanding balance annually, and going beyond it triggers an early repayment charge. On a standard variable rate or many trackers there is usually no limit at all.

On our 250,000 balance, 10 percent is 25,000 a year, which is over 2,000 a month. So the overpayments in the table above are comfortably inside a typical allowance. Someone with a smaller balance and a large bonus to deploy is in different territory.

A few details that catch people out. The allowance usually runs in 12 month blocks and unused headroom does not carry into the next year. Whether the 10 percent is measured against the balance at the start of the year or the current balance varies by lender. And if your mortgage is split into parts, each part may have its own allowance period.

Early repayment charges are typically a percentage of the balance that steps down as the deal runs, something like 5 percent in year one falling to 1 percent in year five of a five year fix. On a large balance that is thousands, which will comfortably swallow the saving you were chasing.

None of this is a reason not to overpay. It is a reason to ring your lender once, ask what your allowance is and how they measure it, and then set the standing order at a level that stays inside it.

When in the month to send it

A small point that costs nothing and is worth knowing.

If your lender charges interest daily, which most now do, then an overpayment starts working the day it lands. Earlier in the month is straightforwardly better than later.

If interest is charged annually, and some older mortgages still are, the timing matters much more. An overpayment made just after the annual calculation date may sit for eleven months before it affects anything. Ask which basis yours uses, because on an annual basis the same money can be worth a full year of interest more or less depending on when you send it.

Either way, a regular standing order timed just after your normal payment is a sensible default. It keeps the balance as low as possible for as much of the month as possible, and you stop having to think about it.

Three things to settle first

More expensive debt. If you are carrying a credit card at 20 percent while overpaying a mortgage at 5, the card is where the money should go. The mortgage is usually the cheapest debt a household has, which makes it the last one to attack rather than the first.

An emergency fund. Money sent to a repayment mortgage is very hard to get back. Clear a card and the credit is still there. Overpay a mortgage and it is gone into the house until you sell or borrow against it. Cover a few months of expenses in something you can reach before you start.

Whether saving pays better. The honest comparison is your mortgage rate against what your money earns elsewhere after tax. When savings rates are above your mortgage rate, saving wins on arithmetic. When your mortgage rate is higher, overpaying wins, and it wins with certainty rather than hope.

One exception to the second point. Offset and flexible mortgages let you overpay and draw the money back when you need it, which removes most of the liquidity problem. If you have one, the calculus changes, and it is worth asking whether yours works that way.

Questions people ask

How much does overpaying actually save?

More than most people expect. On a 250,000 balance at 5 percent with 25 years left, an extra 100 a month saves 25,381 in interest and clears the mortgage 2 years and 11 months early.

Should I shorten the term or lower my payment?

Shortening the term saves considerably more, because your total outgoing stays the same and every overpayment keeps working. Lowering the payment gives much of the benefit straight back. Most lenders default to lowering the payment, so ask for the term reduction explicitly.

Is there a limit on how much I can overpay?

On UK fixed rate deals, usually yes, commonly 10 percent of the outstanding balance a year. Exceeding it triggers an early repayment charge. Standard variable and many tracker deals have no limit. Confirm yours with the lender before setting anything up.

Do I enter my original loan or my current balance?

Your current balance, with the years you have left. Entering the original figures answers a question about a mortgage you no longer have.

Can I model a one off lump sum?

This one models a regular monthly overpayment. For a single lump sum, the loan payoff calculator is the better fit.

Is it better to overpay early or to overpay more?

Early, generally. An overpayment removes every future month of interest on that amount, so money paid with twenty years to run does far more work than the same money with two years to run.

What happens if I stop overpaying?

Nothing bad. You simply revert to your contractual payment and keep whatever reduction you have already bought. Overpayments are not a commitment, which is part of why a modest regular amount you can sustain beats an ambitious one you cannot.

Should I overpay or put the money in savings?

Compare your mortgage rate against your savings rate after tax. Overpaying gives a guaranteed return equal to your mortgage rate, and it is worth weighing that certainty against a savings return you can still access.

References

The ordinary payment used as the baseline is the standard actuarial amortisation relation set out in Regulation Z, with the annual rate treated as a periodic rate multiplied by the number of periods in a year. The guidance on annual overpayment allowances, early repayment charges, the choice between reducing the term and reducing the payment, the timing of overpayments against daily or annual interest, and the advice to clear more expensive debt and hold an emergency fund first follows MoneyHelper, the free and impartial service provided by the Money and Pensions Service.

1. MoneyHelper (Money and Pensions Service), Should You Pay Off Your Mortgage Early? https://www.moneyhelper.org.uk/en/homes/buying-a-home/should-you-pay-off-your-mortgage-early
2. Consumer Financial Protection Bureau (CFPB), Regulation Z, Appendix J to Part 1026: Annual Percentage Rate Computations for Closed-End Credit Transactions. https://www.consumerfinance.gov/rules-policy/regulations/1026/j/
3. Consumer Financial Protection Bureau (CFPB), When Can I Remove Private Mortgage Insurance (PMI) From My Loan? https://www.consumerfinance.gov/ask-cfpb/when-can-i-remove-private-mortgage-insurance-pmi-from-my-loan-en-202/
4. Consumer Financial Protection Bureau (CFPB), What is PITI? https://www.consumerfinance.gov/ask-cfpb/what-is-piti-en-152/