Lump sum or monthly overpayments: what is the difference?
The same total saves more if it goes in sooner, so a lump sum paid today saves a little more than the same money spread across the year. Over one year the gap is modest. Monthly overpayments keep the rest of the money to hand and make an allowance easier to watch; a lump sum has to exist first.
The arithmetic
On £200,000 at 5% over 25 years, £12,000 overpaid in the first month saves about £26,900 of interest. £1,000 a month for the first twelve months saves about £26,100. The lump sum saves about £800 more, because each of its pounds starts reducing the balance up to eleven months earlier.
What the arithmetic leaves out
- Money you might need. Once overpaid, money generally cannot be taken back out. Spreading it keeps what has not gone in yet to hand.
- The allowance. On a deal with an annual allowance, one lump sum can go over it in a single payment, and the part above is charged. A monthly figure makes the running total easier to follow.
- How interest is calculated. Where a lender works out interest annually, a lump sum paid part way through the year may not reduce interest until the next calculation, and the timing difference shrinks. See how mortgage interest is calculated.
- How the lender takes it. Some set a minimum for a one-off overpayment, or accept regular ones only by standing order.
Both at once
Nothing stops a regular overpayment and an occasional lump sum sitting side by side. Keeping a record of each, with the date, the amount and who paid it, is what lets the total be checked against the allowance. That is the record Mortgage Meadow keeps, and it shows how each payment moves the mortgage-free date.
Questions people ask
Is a lump sum overpayment treated differently from a monthly one?
The money reduces the balance in the same way. What can differ is how your lender accepts it, such as minimum amounts or standing orders for regular payments, and whether it takes effect straight away or at the next interest calculation.
Do regular overpayments count towards the overpayment allowance?
Yes. Every overpayment in the allowance year counts, regular or one-off, so twelve monthly overpayments are added together against the annual limit.
More guides
- When does the overpayment allowance reset?
- Overpaying the mortgage or saving: what the sums compare
- How much interest does overpaying a mortgage save?
- What is an overpayment allowance a percentage of?
- Does overpaying reduce the term or the monthly payment?
- How much should my mortgage balance go down each year?