For many people in the UK, owning your home outright is perhaps the ultimate financial achievement. One way to reach that goal faster is by making regular mortgage overpayments so you overpay on the required monthly amount to gradually chip away at the debt. However, lenders often have rules about how much you can overpay especially during an initial deal period.
This guide explains a bit more about the common “10% rule” for mortgage overpayments. We’ll explore what it means, why limits exist, how it works and the benefits and considerations of paying extra off your mortgage. It should help you confidently navigate this aspect of managing your home loan.
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What are mortgage overpayments?
Simply put mortgage overpayments are payments you make towards your mortgage that are above your standard required monthly payment. This extra money goes directly towards reducing the outstanding capital loan amount rather than just covering interest.
Making overpayments can potentially save you a significant amount of interest over the life of the mortgage and help you become mortgage-free much sooner.
Sounds great. Why do lenders limit overpayments?
You might wonder why you can’t just pay back as much extra as you like whenever you want.
It’s a fair question.
Lenders, particularly during fixed-rate or initial discounted periods, have calculated their expected profit based on you paying interest over a certain timeframe. So if you as the borrower repays a large chunk of the loan early, the lender earns less interest than anticipated.
To mitigate this, lenders often include Early Repayment Charges (ERCs) in their mortgage contracts. These charges apply if you repay more than a specified amount during the initial deal period (e.g. during a 5-year fix).
Explaining the 10% mortgage overpayments rule
The “10% rule” refers to the amount most UK mortgage lenders typically allow you to overpay each year without triggering an ERC while you’re within an initial deal period (like a fixed or tracker rate).
Crucially while 10% is common this is NOT a universal rule. The exact percentage, the calculation method and the definition of “year” can vary significantly between lenders and even between different products from the same lender.
The 10% is usually calculated based on the outstanding mortgage balance at the beginning of the lender’s defined “year”. This “year” might be:
- A calendar year (1st Jan – 31st Dec)
- Or the anniversary year of when your mortgage started (e.g. 15th May – 14th May)
Always check your specific mortgage offer document or contact your lender directly to confirm their exact overpayment allowance and rules.
How is the 10% calculated?
As in so many cases, an example is useful here. Imagine your outstanding mortgage balance was £150,000 at the start of your lender’s defined “overpayment year”.
On that basis, your 10% allowance would be 10% of £150,000 or £15,000 overpayment
This means you could potentially overpay up to £15,000 during that specific 12-month period without incurring an ERC. This overpayment could be made as regular monthly extras, a few lump sums, or even one large payment as long as the total doesn’t exceed the £15,000 allowance for that year.
What happens if I overpay more than 10%?
If you’re within your initial deal period where ERCs apply and you overpay more than your lender’s penalty-free allowance (e.g. more than the 10% in our example) you will likely have to pay an Early Repayment Charge.
ERCs are usually calculated as a percentage (e.g. 1-5%) of:
- The amount you overpaid above the allowance OR
- Sometimes the entire outstanding mortgage balance (depending on the specific terms and conditions).
These charges can be substantial – thousands of pounds in some cases – so it’s vital to know your limit before making large overpayments.
See our guide: What are early repayment charges? for more information
Once your initial deal period ends and you move onto the lender’s Standard Variable Rate (SVR) the restrictions on mortgage overpayments are often removed or significantly relaxed but it’s still wise to check your specific mortgage.
Benefits and things to consider about mortgage overpayments
Making mortgage overpayments (within your allowance) can be beneficial but requires thought:
Some of the benefits of overpaying include:
- Reducing your capital balance means less interest accrues over the remaining term potentially saving you thousands.
- Paying off the capital faster shortens the life of your mortgage.
- Owning more of your property outright increases your equity stake.
However, there are also some key things to think about:
- Always confirm your specific overpayment allowance ERC percentage and calculation period.
- Let lenders know payments are overpayments intended to reduce the capital/term otherwise they might just reduce future monthly payments.
- Do you have other debts with higher interest rates (like credit cards or loans)? Paying those off first might be more beneficial.
- Ensure you maintain an adequate emergency savings buffer before making significant overpayments. Don’t leave yourself short.
- Could the money potentially achieve a better return through investing (bearing in mind investment risk)? This depends on your risk appetite and market conditions.
OneDome is here to help
Choosing a mortgage is complex but OneDome is here to help. If you have any questions about whether to opt for traditional or offset mortgages, the wider mortgage process or want tailored advice on the different types of mortgages that suit your situation speak to our friendly mortgage advisors today or call us on 01489555080 or explore our comprehensive mortgage guide for a more in-depth breakdown.
Important: Your home may be repossessed if you do not keep up repayments on your mortgage.