Should you reduce your monthly payment or your mortgage term after an overpayment?

An overpayment (or partial early repayment) is an extra sum paid to your lender on top of your regular monthly payments to reduce the outstanding balance. The amount is deducted from the balance straight away, and from that moment interest is charged on a smaller amount.

After the payment, most lenders let you choose between two options: keep the same monthly payment and shorten the mortgage (term reduction), or keep the same end date and lower the monthly payment (payment reduction). The two options have very different effects on the total cost of borrowing.

Most residential mortgages are repayment mortgages with a constant monthly payment, often called an annuity or French amortisation schedule. The payment stays the same, but its make-up changes over time: early payments are mostly interest, while the capital portion grows month after month.

The payment is calculated with the formula P = B × i / (1 − (1 + i)^−n), where B is the outstanding balance, i the monthly rate (annual rate divided by 12) and n the number of remaining payments. Each month the interest equals the balance multiplied by the monthly rate, which is why every pound of capital repaid early immediately stops generating interest.

Why the early years matter most

Because the balance is highest in the early years, so is the interest. An overpayment made early removes capital that would have generated interest for many years; the same sum paid near the end of the mortgage produces a much smaller saving.

Option 1: reduce the term

If the payment stays the same, the share going to capital becomes larger, because interest is charged on a smaller balance. The balance falls faster and the mortgage ends sooner. The number of months needed is n = −ln(1 − B × i / P) / ln(1 + i).

Option 2: reduce the payment

If the end date stays the same, the lender recalculates the payment with the same formula but a lower balance. The payment falls, but capital is repaid at the same proportional pace as before, so interest keeps accruing for all the remaining years.

A worked example

Take an outstanding balance of £150,000 at a 3% fixed rate with 20 years (240 payments) left. The monthly payment is about £831.90 and future interest totals about £49,650. Now assume a £20,000 overpayment.

Reducing the payment spreads the £130,000 balance over the same 240 months: the new payment drops to about £721 and total interest becomes about £43,030, a saving of about £6,600.

Reducing the term keeps the payment at £831.90 and the mortgage ends after 199 months instead of 240, roughly 3 years and 5 months earlier. Total interest falls to about £34,560, a saving of about £15,100: more than double the other option.

Shortening the term is the most efficient choice for interest, but it is not always best for every household. Lowering the payment can make sense if your monthly budget is tight, if you expect your income to fall, if you want to build an emergency fund or if you prefer to invest the monthly difference.

Affordability matters too: a lower payment reduces the risk of payment difficulties. It is a choice for flexibility, paid for with a higher overall cost.

Before choosing, compare your mortgage rate with the net return you could earn by investing the same money and with the cost of any other debts. If you have more expensive borrowing, such as personal loans or credit cards, it usually pays to clear that first.

Make sure you keep a cash reserve for emergencies: money paid into a mortgage is not easy to get back. Check your lender's overpayment allowance and any early repayment charge, and ask for an updated repayment schedule for both options.

To see the difference for your own case, enter your outstanding balance, rate, remaining years and extra sum in the SmashMyRate calculator and switch between "Reduce term" and "Reduce payment": the interest saved updates in real time.

Does reducing the term always save more?

For the same overpayment and rate, yes: keeping the payment high repays capital faster and cuts total interest more than lowering the payment.

Can I change my mind later?

It depends on the lender. With a further overpayment you can often choose again, but check your mortgage terms.

Does this apply to variable-rate mortgages?

The principle is the same, but the exact saving depends on future rate changes, so the figures are estimates.