How mortgage overpayments work
Every mortgage payment covers interest first, then principal. In early years most of each payment is interest. Paying extra on top of the standard payment targets principal directly, shrinking the balance that interest is calculated on next month.
Worked example. A £200,000 mortgage at 5% over 30 years has a standard monthly payment of about £1,074. Paying an extra £200 a month clears the loan roughly 6 years early and saves over £40,000 in interest.
The maths behind it
The standard monthly payment is calculated using the standard loan payment formula. Two amortisation simulations then run in parallel: one with the standard payment and one with the higher payment. The difference in total interest paid is the saving; the difference in months is the time saved.
Things to check before overpaying
Some mortgages impose early repayment charges (ERCs) above a certain annual overpayment amount — commonly 10% of the outstanding balance. Check your mortgage terms before sending extra payments, and make sure any overpayments are applied to principal rather than treated as advance payments.