Mortgage Overpayment Calculator: New Payment and Savings

How the calculation works

Mortgage Overpayment: How to Calculate the Effect on Your Repayments

An overpayment is a lump sum paid towards the capital of a mortgage before the agreed term ends. Interest is charged on the outstanding balance, so each amount repaid reduces the interest that would otherwise build up over the rest of the term. This calculator estimates the effect of a single partial overpayment on a repayment mortgage, showing the new monthly repayment, the interest saved and the net saving.

The annuity formula and the new repayment

Most UK repayment mortgages use an annuity structure. The monthly payment stays constant for the whole term, but its split between interest and capital changes over time. In the early years most of each payment is interest; as the balance falls, a growing share goes towards capital. The calculator uses the standard formula for this structure, where r is the monthly interest rate, obtained by dividing the annual nominal rate by 12, and n is the number of remaining monthly repayments.

After an overpayment of amount A, the lender recalculates the repayment on the new balance, C − A, keeping the same remaining term. The formula is unchanged and is simply applied to a smaller balance. For a given rate and term, the repayment is directly proportional to the balance. The new repayment therefore equals the old one multiplied by (C − A) / C, so the percentage cut in the repayment equals the percentage of the balance overpaid. Overpaying 10% of the balance reduces the repayment by 10%.

The same relationship explains the interest saving. The total interest still to be paid without an overpayment is the sum of all remaining repayments minus the balance. The calculator's saving, (P − P') × n − A, equals the overpaid share of that remaining interest, which is A / C multiplied by (n × P − C). An overpayment of 10% of the balance therefore removes 10% of the interest still to be paid, provided the rate does not change.

Two inputs need care. At a zero rate the formula divides zero by zero, so it cannot be applied as written. In that case the repayment is simply the balance divided by n, and the interest saving is zero. The term n must be at least one month, because with n equal to zero the denominator is also zero. The overpayment A must not exceed the balance C. If A equals C, the loan is cleared, the new repayment P' is zero and the saving equals all the interest still to be paid. An A larger than C has no meaning for this calculation.

Reducing the repayment or shortening the term

An overpayment can be used in two ways. The more common option is to reduce the monthly repayment and keep the term. This is the case modelled here: the balance falls, and the repayment is recalculated over the same number of months. The alternative is to keep paying the same monthly amount so that the mortgage ends sooner. In that case the interest saving can be larger, because interest stops accruing earlier and the final years are cleared. Which of these options apply depends on your contract, so confirm them with your lender before making a payment.

Early repayment charges and overpayment limits

An early repayment charge (ERC) is a fee a lender may apply when part or all of a mortgage is repaid during a set period, such as a fixed or introductory period. The charge, and any allowance for overpayments made without one, are set out in your mortgage offer and key facts illustration. This calculator does not apply an ERC or any overpayment allowance, because these depend on the product and the lender's terms.

To judge whether an overpayment is worthwhile, compare the net saving shown by the calculator with any charge that would apply. If the charge is larger than the saving, the overpayment is unlikely to be worthwhile.

Fixed, tracker and variable rates

The rate used in the calculation depends on the product. On a fixed-rate deal the rate stays the same until the fixed period ends, so the calculation is most reliable for that period. A tracker mortgage follows Bank Rate plus a margin set by the lender, so its rate changes when the Bank of England changes Bank Rate. A product may also be linked to SONIA, the Sterling Overnight Index Average, which the Bank of England publishes. A standard variable rate is set by the lender and can move independently of Bank Rate.

The calculator assumes the rate you enter stays constant over the remaining term. For tracker and variable products, the result is therefore a snapshot. Later rate changes would alter both the real repayment and the saving.

When overpaying is worth considering

Overpaying is most useful when the rate on the mortgage is high compared with the return available on other uses of the money, such as savings, and when many years remain. Early in the term most of each repayment is interest, so an overpayment made then removes a larger share of future interest than one made near the end. Near the end of the term, most of each repayment is capital and the effect is smaller.

Money paid into a mortgage is not available if income falls or an unexpected cost arises. Keeping an emergency fund in accessible savings should come before overpaying. MoneyHelper, the free guidance service backed by the UK government, publishes independent information on mortgages and overpayments that is worth reading before a decision.

What this calculator does not include

The calculator covers capital and interest only. It does not include arrangement fees, valuation or legal costs, mortgage protection insurance, buildings insurance or account charges. These costs are set out in the mortgage offer and can change the overall cost of borrowing. Interest-only mortgages follow a different structure, and this formula does not apply to them.

Results are estimates. A lender may use a different calculation method, round figures differently or apply interest on a different schedule from the one assumed here.

Common mistakes

Four common errors are worth avoiding. The first is using the original loan amount instead of the balance still owed. The second is entering the term in months where the field expects years, or the reverse. The third is ignoring an early repayment charge, which can cancel out a saving that looks large. The fourth is assuming the saving on a tracker mortgage will stay the same, when it moves with Bank Rate.

When not to use this calculator

This calculator models one overpayment made at a single point in time, with the rate held constant. It is not suitable for interest-only mortgages, for several overpayments made on different dates, or for a planned switch to another lender. Those situations need a schedule that tracks each payment and each rate change.

For a full analysis of your own situation, speak to a mortgage adviser regulated by the Financial Conduct Authority. An adviser can compare an overpayment with alternatives such as remortgaging and can read the terms of your contract.