How to Calculate Mortgage Overpayment
What is Mortgage Overpayment?
Mortgage overpayment pays more than the required monthly amount. Even small regular overpayments save tens of thousands in interest and cut years from the mortgage term.
Formula
Interest saved from overpayment = Sum of interest on principal reduction across remaining term; Payoff acceleration = Original term − New term
- M
- Original mortgage balance (Currency)
- Extra
- Additional payment amount (Currency)
- r
- Annual interest rate (Percentage)
- n
- Remaining term (Years)
Step-by-Step Guide
- 1Overpayment reduces outstanding principal directly
- 2Less principal = less interest each month (snowball)
- 3Most lenders allow 10% of balance/year penalty-free
- 4Effect compounds — savings accelerate over time
Worked Examples
Input
£200k, 5.5%, 20yr, £200/mo extra
Result
Saves ~£28k interest; repaid 4 years early
Frequently Asked Questions
Is overpaying always the best use of money?
If mortgage rate > investment return, yes. 6.5% mortgage vs 4% bond returns → overpay. But 6.5% mortgage vs 10% stock market expected return → invest elsewhere.
Should I overpay if I have credit card debt?
No. Credit card rates (18%–25%) far exceed mortgage (6%–7%). Pay credit cards first. Mortgage is the cheapest debt; pay it last (strategically).
What if rates drop, can I refinance?
Yes, but refinancing costs $3–6k in closing costs. Break-even is 18–36 months. If you plan to stay, refinance. If overpaying for rate, overpay instead.
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