How to save thousand pounds easily in 2025

As the new year approaches, it’s the perfect time to reassess your finances and set goals for the year ahead. We know that UK population is living difficult times to be able to buy a house and we wish you the best luck for that next step in your life, but for those many homeowners, we have some information that you need to know about your mortgage! One of the most effective ways to save thousands of pounds is by overpaying your mortgage. This simple strategy with just a few pounds extra can significantly reduce the total interest paid over the life of the loan, potentially saving you thousands of pounds. This strategy also shortens the mortgage term, allowing you to achieve full homeownership sooner. As always we want to explain all easily for the reader by giving examples of how overpayments would change your mortgage, so here we go with our explanation.

Understanding Mortgage Overpayments

First thing to understand is what is really mortgage overpayments, which is self-explanatory, mainly consists in pay extra money (over the agreed amount) towards your mortgage. This can be made in two ways:

Regular Overpayments: Adding extra funds to your monthly mortgage payment. For example if your mortgage is £861 per month you could overpay an extra £39 to make it £900 per month, that will be notable saving on the overall interest.
Lump-Sum Overpayments: Making a one-time payment in addition to your regular payments. If you have a bit of extra month because of a bonus, commission or just because you have it whichever source is coming from, you can overpay to reduce the term or the monthly payment.

Before proceeding, it’s crucial to review your mortgage agreement or consult your lender to understand any potential fees or limitations associated with overpayments. For example, Halifax allows you to overpay 10% of your total balance on January 1st, while Natwest allows you to overpay 20% based on the balance on the anniversary of the mortgage. These may change in your case, so ensure you read your mortgage terms before doing this.

Current Mortgages in the UK

For this article, we did some research about which are interest rates at the time and we have found as of December 2024 the ones below. To start, interest rates are associated with the Bank of England’s base rate, which is 4.75%,. That rate is influencing mortgage interest rates across the country. At the time of writing average mortgage rates are approximately these:

Two-Year Fixed-Rate Mortgage (40% deposit/equity): 4.33%
Five-Year Fixed-Rate Mortgage (40% deposit/equity): 4.22%
Two-Year Fixed-Rate Mortgage (10% deposit): 5.47%
Five-Year Fixed-Rate Mortgage (10% deposit): 5.05%

For our calculations we will be using a round number as 4.5% for interest rates. For property price, as a reference, the average UK house price is currently £292,059, but to simplify the calculation we will be using a round number, £200,000.

The Impact of Mortgage Overpayments

Consider a homeowner with a £200,000 mortgage at a 4.5% interest rate over a 25-year term. Without overpayments, the monthly payment would be approximately £1,111, and the total interest paid over the term would be about £133,333. That means that at the end, the total cost of the mortgage would be £333,333.

Regular Monthly Overpayments:

£100 Extra per Month:
- New Monthly Payment: £1,211
- Reduced Mortgage Term: ~22 years and 6 months, you would be finishing your mortgage 2 years and half earlier!
- Total Interest Paid: ~£119,000
- Total Interest Savings: ~£14,333 (not bad for just £100 extra a month!)
£200 Extra per Month:
- New Monthly Payment: £1,311
- Reduced Mortgage Term: ~20 years and 6 months, 4 years and a half earlier!
- Total Interest Paid: ~£106,000
- Total Interest Savings: ~£27,333

Annual Lump-Sum Overpayments:

£1,000 Lump Sum Annually:
- Reduced Mortgage Term: ~23 years, so you will finish 2 years sooner.
- Total Interest Paid: ~£121,500
- Total Interest Savings: ~£11,833
£5,000 Lump Sum Annually:
- Reduced Mortgage Term: ~18 years, you would finish 7 years sooner!
- Total Interest Paid: ~£90,000
- Total Interest Savings: ~£43,333

Factors to Consider Before Overpaying

Although it was briefly mentioned before, you need to carefully read your terms and also thinks about your personal circumstances, these are some of the considerations that should think before doing an overpayment.

Early Repayment Charges (ERCs): Some mortgages impose fees for overpayments beyond a certain limit, for example some lenders say you have a fee of 2.5% above the overpayment allowance. Review your mortgage terms or consult your lender to understand any potential charges.
Emergency Savings: Ensure you maintain an adequate emergency fund before committing extra funds to your mortgage. You never know when things can go wrong, so it is advisable to have 3-6 months of expenses saved.
Alternative Investments: Compare the benefits of overpaying your mortgage against potential returns from other investments. If you thing you can achieve higher returns elsewhere, it might be more advantageous to invest your extra funds.
Tax Implications: While mortgage interest isn’t tax-deductible in the UK, other investments may have tax considerations. Consult a financial advisor to understand the tax implications of your decision.

Bonus information

Going in depth into the calculation of monthly payments might be quite complex at this stage, however we can give you a easier way to calculate approximate payments of interest and capital.

Firstly, you need to know what is capital repayment and interest. Capital is the amount that you owe to the lender while the interest is based on the rate and on the capital that you owe. For the above example, your capital to repay is £200,000 and the interest rate is 4.50%.

To simplify the maths, you could calculate the approximate annual interest as £200,000 x 4.5% which is £9,000, and then divide that by 12 months, that is £750 of the £1,111 monthly payment that is just interest. Translating, that is £1,111 – £750 = £361 of capital that you repay every month. However, when you do an overpayment, that is just capital that you repay, so overpaying £361 makes the same job as your regular £1,111 monthly payment, knocks on month off your term.