Are You Able to Make Early Repayments on a Secured Loan?

Yes, you can make early repayments on a secured loan. Making early repayments on the loan could help you save money, reducing the total cost of borrowing of the loan.  However, early repayments may not always be economically beneficial. A variety of factors will affect whether it makes sense to repay early:

• The rate of interest on the loan
• The initial loan amount
• The amount of time you have remaining on the loan
• The fees charged for early repayment 

An “overpayment” is the term used to describe making early repayment on a secured loan (e.g. a mortgage). With an overpayment, the borrower repays more money than is required towards their monthly loan repayment. Doing so may allow the borrower to pay off their loan earlier than the initially agreed loan term whilst also reducing the total amount of interest paid over the lifetime of the loan.

There may be an associated cost to making overpayments. These costs are determined by the specific terms of your loan agreement. We’d suggest contacting your lender to fully understand these terms and ensure you’re making the right decision regarding overpayments. 

Whether early repayment fees are charged will vary from lender to lender. It’s important that borrowers consider if they can actually afford to make overpayments which are paid on top of your existing monthly obligations.

Usually lenders allow borrowers to overpay by 10% of their mortgage balance each year when mortgages are in the initial fixed period of the loan. Once the introductory fixed deal has elapsed or if the borrower is paying a standard variable rate, there is no cap on the amount of overpayments that can be made.

Often, lenders will penalise borrowers for making overpayments. Charges typically range from 1-5 percent of the amount being overpaid. A lender’s preference is that borrowers remain on their initially agreed monthly repayment schedule. This allows them to net the exact level of interest income predicated by the loan term. If a borrower repays early, this potentially results in the lender receiving less expected net interest income than initially anticipated. As a result overpayment fees are put in place to deter such behaviour. 

Will I save money by making overpayments on my secured loan?

Usually borrowers will make overpayments on their secured loan to save money. Making overpayments on the loan can help to lower overall costs, allowing borrowers to pay off their balance with the lender sooner than originally anticipated.

Depending on how much you are willing to make in overpayments, you could save anywhere from hundreds to possibly thousands of pounds. If the mortgage is sizable and the corresponding interest rate is high it makes sense to make larger overpayments. 

Make sure to analyse the nature of your secured loan carefully. It’s important to make sure you fully understand the repercussions of making overpayments, validating whether it actually makes economic sense.