When clients ask about overpaying their buy-to-let mortgage, I often challenge them to consider whether overpaying the residential mortgage might be a better financial move.
If you have both types of mortgages, it’s important to look beyond the surface. While reducing any debt is a positive step, I firmly believe that – in most cases – overpaying the residential mortgage should be prioritised. Here’s why.
First of all, if you’re in a position to overpay any mortgage, congratulations. That in itself is a sign of strong financial discipline. Especially in a high interest rate market, reducing your mortgage balance is a smart decision.
Most UK mortgages operate on a daily interest basis – meaning any overpayment immediately starts reducing the interest charged. Lenders typically allow up to 10% of the outstanding balance each year as overpayments without penalty, although this can vary. Some lenders may offer higher allowances (like 20%), base the allowance on the original loan amount, or in some cases, may not allow overpayments at all.
Peace of Mind in Uncertain Times
As someone who advises clients on mortgages for a living, I still want every one of them to become mortgage-free as soon as possible. Owning your home outright is a significant milestone – not just financially but emotionally.
In times of health issues or job instability, it’s the residential mortgage that causes the most stress. Having a fully paid-off home provides a sense of security that’s hard to quantify. The sooner that’s achieved, the better.
Your Residential Mortgage Is Tied to Your Earning Ability
Residential mortgages are often dependent on your active income – your ability to earn through employment or self-employment. In contrast, a buy-to-let mortgage is supported by rental income, which doesn’t rely on your age, health, or ability to work. This makes residential debt more critical to clear.
The interest on a residential mortgage is a personal expense – it offers no tax relief.
However, interest on a buy-to-let mortgage provides some tax advantage. While the relief isn’t as generous as it once was (especially for higher-rate taxpayers), it still exists. From this standpoint, it may be more efficient to retain the buy-to-let mortgage for longer while eliminating the tax-neutral residential mortgage.
Most residential mortgages are structured on a repayment basis, while buy-to-let mortgages are usually interest-only. Overpaying a repayment mortgage reduces both interest and capital and can give you the option to:
- Reduce your monthly payments, or
- Shorten the term and become mortgage-free sooner.
Buy-to-let mortgages don’t usually offer these flexibilities unless you’re actively remortgaging or restructuring the deal.
That’s not what I’m saying.
There are situations where it may make sense to overpay the buy-to-let mortgage:
- If you’ve already maxed out the overpayment allowance on your residential mortgage for the year.
- If your residential mortgage is at a low balance or loan-to-value (LTV) and is already benefiting from the best interest rates.
- If the buy-to-let mortgage is moving to a much higher rate, it could be smart to reduce the balance and soften the blow.
For example:
I strongly advocate for prioritising residential mortgages – yet I’m personally planning to overpay my buy-to-let mortgage next year. Why? I’m coming off a 1.6% fixed rate and expect it to jump to over 4%. Reducing the balance will make the property more viable and profitable in the long run and will potentially reduce the need to consider disposing the property for cashflow or profitability reasons.
Another example: if your residential mortgage is already below 60% LTV and you’re accessing the best rates, but your buy-to-let property is at a higher LTV, reducing that balance may help you unlock better rates and improve long-term profitability.
Everyone’s financial situation is different. There’s no one-size-fits-all rule – and advice should always be personalised.
That said, in most situations, overpaying the residential mortgage should be the default position, and overpaying the buy-to-let mortgage can follow once that’s under control.
Some lenders make it easier for clients to overpay and become mortgage-free sooner. Worth mentioning are:
- NatWest and Metro Bank – both offer 20% annual overpayment allowances without early repayment charges (ERCs) on fixed-rate mortgages.
- Metro Bank even bases this on the original mortgage amount, so you could potentially clear your mortgage in just five years.
When choosing a mortgage, it’s worth factoring in the overpayment flexibility alongside the interest rate and product fees – especially if being mortgage-free is a personal goal.
While fixed-rate mortgages are a popular choice-especially for those who want certainty over their monthly payments-they may not always be the best fit for borrowers whose goal is to overpay and clear the mortgage early. In such cases, a tracker mortgage with no Early Repayment Charges (ERCs) could be a better option, as it offers greater flexibility to make larger or more frequent overpayments without penalty.
Similarly, for those who have a reasonable amount of savings but prefer not to part with the funds permanently, an offset mortgage can be a smart alternative. This structure allows you to keep your savings accessible while using them to reduce the interest charged on your mortgage. It’s a flexible way to balance liquidity with long-term interest savings.
Wherever you are in your property journey – residential homeowner, aspiring landlord, or seasoned investor – the idea of being mortgage-free should always be part of the long-term plan. A little thought today can help you get there faster and with greater peace of mind.
Whether you’re just getting started or working towards becoming mortgage-free, making the right choices now can make a big difference later.
At Nachu Finance we are happy to assist you all the way – get in touch with us today for clear, tailored advice based on your personal circumstances.
