What is an overpayment allowance a percentage of?
Of one of three things, and your deal picks which: the amount you originally borrowed, the balance on a fixed date each year, or the balance outstanding at the time. On the same mortgage those give materially different amounts, so the percentage on its own does not tell you what you can pay.
Most fixed-rate deals let you overpay a set amount each year without an early repayment charge. The percentage is usually quoted on its own — "10% a year" — as though it settled the question. It does not, because 10% of what is the part that varies.
The three bases
- The original loan. The allowance is fixed for the life of the deal: 10% of what you borrowed, whether you have paid off a little or a lot.
- The balance on a fixed date. Usually the 1st of January, or the anniversary of the mortgage. The allowance is recalculated once a year and then does not move until the next one.
- The balance outstanding. Recalculated as you go, so the allowance shrinks as the mortgage does.
Why it matters more than the percentage
Take somebody who borrowed £300,000 and now owes £240,000. At the same headline 10%:
- on the original loan, the allowance is £30,000;
- on the outstanding balance, it is £24,000.
Six thousand pounds apart, from the same number. Ten years in, with £120,000 left, the gap is £18,000. The further through a mortgage you are, the more the basis matters — which is exactly when people start overpaying seriously.
The year matters too
An allowance year runs either from the mortgage anniversary or from 1 January, and the difference is not academic. If yours runs on the calendar and you make a large overpayment in December, a second one in January is a new year's allowance. If it runs on the anniversary, it may not be.
Whether an unused allowance carries over is also set by the deal. Usually it does not.
How to find yours
It is in your mortgage offer, in the section on early repayment. Three things to write down: the percentage, what it is a percentage of, and when the year turns over. Those three settle it.
What happens above the allowance
The charge applies to the excess, not to the whole overpayment. Going £1,000 over a £24,000 allowance on a 2% band costs £20, not £480. That distinction is worth knowing, because the fear of a charge stops people overpaying far more often than the charge itself costs anything.
If you put your allowance and your charge bands into Mortgage Meadow, the what-if simulator shows what fits inside it and what a charge on the rest would come to, year by year, at the band in force in each month.
Questions people ask
Is the overpayment allowance always 10%?
No. It is set by your mortgage deal — some are higher, some lower, and the percentage is only half the answer because what it is a percentage of varies too. Your mortgage offer states both.
What happens if I go over the allowance?
An early repayment charge applies to the amount above the allowance, not to the whole overpayment. The rate and the period it applies for are in your mortgage offer.
Does an unused allowance roll into next year?
Usually not — most deals reset the allowance each year and unused headroom is lost. Your mortgage offer will say.