Typical Overpayment Allowances
The standard overpayment allowance for most UK mortgage products is 10% of the outstanding balance per year. This means if your mortgage balance is £200,000, you can overpay up to £20,000 in that year without incurring any early repayment charges.
Some lenders are more generous, offering 15% or even 20% annual overpayment allowances. A few products — particularly variable rate mortgages, some tracker deals, and mortgages that have reverted to the SVR — have no overpayment limit at all, allowing you to pay off as much as you like.
How Overpayment Limits Are Calculated
The 10% allowance is typically calculated as 10% of the outstanding balance at the start of the year (either the calendar year or the anniversary of the mortgage starting, depending on the lender). Some lenders calculate it from the start of each deal period rather than annually.
It's important to check your specific mortgage terms, as the calculation method varies between lenders. Some calculate the allowance on the balance at the start of the year, while others use the balance at the start of the deal. The difference can be significant if you've already made substantial overpayments during the deal period.
What Happens If You Overpay More Than the Limit?
If you exceed your overpayment allowance, you'll be charged an early repayment charge (ERC) on the excess amount. ERCs are typically between 1% and 5%, depending on how far into your deal you are — they tend to be higher in the early years and decrease as you approach the end of the deal period.
For example, if your allowance is £20,000 and you overpay £25,000, the ERC would apply to the excess £5,000. At a 3% charge, that's £150. In some cases, the interest savings from the overpayment still outweigh the ERC, but you should always do the calculation before exceeding your allowance.
Strategies for Maximising Your Overpayments
To make the most of your overpayment allowance:
- Spread overpayments through the year: Rather than making one large payment, regular monthly overpayments ensure you benefit from reduced interest throughout the year
- Use the full allowance: If you have savings beyond your emergency fund and your mortgage rate exceeds savings rates, using your full annual allowance is financially sensible
- Time lump sums carefully: If your allowance resets on a specific date, time large overpayments to span two allowance periods
- Check the small print: Some lenders allow you to carry forward unused allowance from previous years
Important: Your home may be repossessed if you do not keep up repayments on your mortgage. There will be a fee for mortgage advice. The actual rate available will depend on your circumstances. Think carefully before securing other debts against your home.