Mortgage overpayment trick: switching to smaller fortnightly payments could save you £16k

Making smaller payments more often could wipe years off your mortgage term and save you thousands of pounds in interest. Here's how it works.

Wondering how to reduce your mortgage term early? 

However, experts at John Charcol have come up with an unusual spin on mortgage overpayments to help you save money and clear your debt faster.

Choosing to pay your mortgage with fortnightly payments instead of monthly ones could shave up to £16,000 and three to four years off your mortgage term (based on a £200,000 mortgage on a 4% rate over 25 years).

This is because, by making 26 half mortgage payments every 52 weeks, you’ll make the equivalent of 13 full monthly payments in a year instead of 12.  

How to save thousands in interest

Nicholas Mendes, of broker John Charcol, told The Telegraph: “This extra payment goes straight towards reducing your principal, which in turn lowers the interest you’ll pay over the life of the loan.

"Over time, this can reduce your mortgage term and save you thousands in interest.”

Many mortgage lenders will let homeowners overpay their mortgage by up to 10% a year, but NatWest allows overpayments of up to 20% without homeowners incurring an early redemption penalty.

In the example above, homeowners would be overpaying by 8% or £1,055 a year.

The difficulty is whether your lender will allow you to make bi-monthly payments and how they will process the payments.

“Another crucial point to consider is how your lender processes fortnightly payments,” explained Mendes.

“Ideally, each payment should be applied directly to your loan balance as soon as it’s received, which helps reduce the interest charged immediately.

“However, some lenders may hold payments until they accumulate to a full monthly amount, which reduces the benefit of making more frequent payments.”

Will your lender allow it?

Santander does not allow customers to make fortnightly payments. However, Nationwide, Halifax, Barclays and Virgin Money allow customers to do so, as long as the repayments reach them on time.

Mortgage holders should obviously also consider whether they can afford to do so, given the additional payments each year and the large payments going out twice a month instead of once.

But it's a clever way of using overpaying without it making a huge difference to your bank balance.