Overpaying Your Mortgage: The Right Move in 2025?

January 6th, 2025

For contractors and freelancers, financial planning is paramount. Unlike salaried employees, your income can be irregular, so making the right decisions about your money is crucial.

A frequent topic when it comes to your mortgage is whether or not to overpay. This is something we touched upon at the start of 2024, but with new developments in the UK financial space, could 2025 be the best time to start overpaying?

We look at the current landscape and evaluate the benefits and potential risks of overpaying your mortgage, specifically for contractors and freelancers.

What Does Overpaying Your Mortgage Mean?

Overpaying your mortgage involves paying more than your required monthly repayment. This could be through occasional lump-sum payments or by increasing your monthly payment amount.

Many mortgage providers allow overpayments up to a certain limit without incurring penalties, typically 10% of the outstanding balance each year.

The Benefits of Overpaying Your Mortgage

1. Save on Interest Payments Overpaying reduces the total amount of interest you’ll pay over the life of your mortgage. For contractors and freelancers, who often seek flexible financial products, reducing long-term costs can free up funds for other goals like retirement planning or investing in your business.
2. Shorten the Mortgage Term By reducing the balance faster, you could pay off your mortgage years earlier than planned. This might be especially appealing if you’re concerned about the unpredictability of future earnings and want to secure a debt-free status sooner.
3. Increased Financial Security Knowing that your home is closer to being fully paid off can provide peace of mind, particularly during quieter periods when work may be less consistent.
4. Flexibility for the Future Overpaying now might allow you to underpay or take payment holidays later (if your mortgage terms permit it). This flexibility can be invaluable for freelancers who might face irregular income or extended breaks.

The Risks of Overpaying Your Mortgage

1. Reduced Liquidity As a contractor or freelancer, maintaining an accessible emergency fund is essential. Overpaying your mortgage ties up cash in your property, which could leave you vulnerable in case of unexpected expenses or income gaps.
2. Potential Penalties Some mortgage agreements include penalties for overpayments that exceed a set limit. It’s crucial to check the terms of your mortgage to avoid unexpected charges.
3. Missed Investment Opportunities The funds used to overpay your mortgage could potentially earn a higher return if invested elsewhere. For example, if you’re paying a low interest rate on your mortgage, investing in a pension, ISA, or other financial products might yield better long-term benefits.
4. Impact on Tax Efficiency Contractors and freelancers often benefit from tax-efficient financial planning. Before overpaying your mortgage, consider whether you could use those funds to maximise your pension contributions or other tax-saving opportunities.

But… Is it Right For YOU in 2025?

The mortgage market in 2024 saw significant developments that could influence your decision to overpay in 2025. Rising interest rates, a tightening of lender criteria, and changes to inflation forecasts have all shaped the financial landscape. Contractors and freelancers should weigh these trends carefully:

1. Higher Interest Rates The Bank of England Base Rate currently sits at 4.75%, although this decrease hasn’t been mirrored in the current products being offered by major lenders, as November saw the last sub 4% deal be removed from the market.

If you’re on a fixed-rate mortgage secured at a lower rate, overpaying could be advantageous to mitigate the impact of potential refinancing at higher rates when your term ends.

• Inflation Trends Inflation in the UK remained elevated throughout 2024, reaching 2.6% in November, an increase from 2.3% in October. While savings account interest rates improved, they still lagged behind inflation in real terms. Overpaying your mortgage could act as a more effective hedge against inflation if your mortgage rate is higher than the returns offered by savings accounts.
• Economic Uncertainty Contractors and freelancers often face income volatility, and 2024’s economic conditions underscored the importance of financial flexibility. While overpaying might save on interest, maintaining accessible cash reserves should remain a priority to navigate periods of irregular income or unexpected expenses.

So… Should You Overpay in 2025?

In 2025, overpaying your mortgage could be beneficial if:

• You’re on a higher-interest mortgage compared to savings rates.
• You have a solid emergency fund and minimal high-interest debt.
• You’re looking to reduce financial obligations ahead of potential income changes.

However, caution is warranted if:

• You lack sufficient cash reserves.
• Investment opportunities offer higher potential returns.
• You’re unsure about future income stability.

Is Overpaying Right for You?

Whether overpaying your mortgage is a good decision depends on your individual circumstances:

• Your Mortgage Rate: If your mortgage interest rate is low, you might achieve better returns by saving or investing instead.
• Your Savings Cushion: Before overpaying, ensure you have at least six months of essential expenses saved in an accessible account.
• Your Long-Term Goals: Consider how overpaying aligns with your personal and professional goals. For instance, if you plan to expand your freelance business, retaining liquid cash might be more beneficial.

Tips for Contractors and Freelancers Considering Overpayments

1. Consult a Specialist Adviser Working with a mortgage adviser who understands the unique financial challenges of contractors and freelancers is invaluable. At CMME Mortgages, we specialise in supporting self-employed professionals and can help you weigh the benefits and risks of overpayments.
2. Start Small Test the waters by making modest overpayments to see how it affects your budget and financial flexibility. This can help you gauge whether larger payments are feasible in the future.
3. Prioritise High-Interest Debt If you have other debts with higher interest rates, pay these off first before considering mortgage overpayments.
4. Review Your Mortgage Terms Check whether your mortgage allows overpayments and whether there are any associated penalties. Understanding your options will prevent costly mistakes.

Final Thoughts

Overpaying your mortgage can be a smart financial move, but it’s not a one-size-fits-all solution. For contractors and freelancers, the decision should be carefully balanced against the need for liquidity, investment opportunities, and financial security.

At CMME Mortgages, we’re here to help you navigate these decisions. Whether you’re looking to overpay, remortgage, or simply explore your options, our team can provide tailored advice to fit your unique circumstances. Contact us today to learn more about how we can support your mortgage journey.