Does overpaying reduce the term or the monthly payment?
Either, and it is your lender's arrangement that decides which — not the overpayment. Shortening the term saves the most interest. Lowering the payment saves less but frees up money each month. Some lenders do one by default, some do the other, and some do nothing at all until you ask.
This is the question people get wrong most often, usually because they have read that overpaying "takes years off your mortgage" and assumed that is automatic. It is a choice, and often somebody else's default rather than yours.
The two outcomes
Take a mortgage with £180,000 left, 20 years to run, at 5%. The contractual payment is a little under £1,190 a month. Now pay £200 extra.
- Reduce the term. The payment stays at £1,190. The balance falls faster, so the mortgage ends earlier — and every month you do not pay is a month of interest you do not pay.
- Reduce the payment. The term stays at 20 years. The lender recalculates the monthly payment down against a smaller balance, so you pay slightly less each month for the same length of time.
Reducing the term saves more interest, because interest is charged on what you owe for as long as you owe it. Reducing the payment gives you the money back now. Which of those matters more is a question about your household, not about mortgages, and it is not one we will answer for you.
Why it might appear that nothing happened
Three ordinary reasons, none of which mean the overpayment was lost.
- The default was reduce-payment. The term is unchanged because it was never going to change; the monthly figure went down by a few pounds instead.
- Nothing is applied until you ask. Some arrangements hold an overpayment against the balance but leave both the term and the payment alone until instructed.
- Interest is only recalculated periodically. Where interest is worked out annually rather than daily, an overpayment reduces the balance immediately but does not change what you are charged until the next recalculation.
What this app assumes
Mortgage Meadow models the reduce-the-term arrangement: the contractual payment stays where it is and overpayments bring the mortgage-free date closer. That is the common arrangement and the one that saves the most interest, but lenders differ — if yours reduces the payment instead, the projection here will be more optimistic about the date than your mortgage actually is.
It is set out alongside every other simplification in how we work it out.
Questions people ask
Which saves more interest, reducing the term or the payment?
Reducing the term. Interest is charged on what you owe for as long as you owe it, so ending the mortgage earlier removes months of interest entirely, while a lower payment spreads a smaller balance over the same length of time.
Can I change which one my overpayments do?
That is between you and your lender — it is set by your mortgage arrangement, not by how the payment is made. Ask them what happens to an overpayment before you make a large one.