Reduce term or reduce payment? How to decide
There's no single right answer — it depends on your financial priorities and the interest rate environment at the time you overpay. Mathematically, reducing the term always saves the same or more total interest than reducing the payment, because the debt is cleared sooner and stops accruing interest earlier. If your main goal is to pay the least amount possible over the life of the mortgage and your finances are stable, reducing the term is usually the more efficient choice.
Reducing the payment, however, has an advantage that doesn't show up in the numbers: it frees up monthly cash flow immediately. This matters most if you're on a variable or tracker rate and expect interest rates to rise, if you want more of a buffer against rising living costs, or if you have other savings or investment goals that could use that freed-up cash. In a higher interest rate environment, each pound overpaid "earns" more in unpaid interest, which tends to tilt the decision towards reducing the term instead.
How the standard repayment mortgage formula works
The vast majority of UK mortgages are repayment mortgages with a constant monthly payment for the life of the deal (or until the rate changes). What varies each month is the split between interest and capital repaid: early on, most of the payment is interest; as the mortgage progresses, more of each payment goes towards capital, even though the payment itself doesn't change.
The formula for the constant monthly payment is:
P = L × r / (1 − (1 + r)−n)
where P is the monthly payment, L is the outstanding loan balance, r is the monthly interest rate (the annual rate divided by 12) and n is the total number of remaining monthly payments. When you make a lump-sum overpayment, this same formula is recalculated in one of two ways depending on what you choose: keeping P fixed and solving for a new, shorter n (reduce term), or keeping n fixed and solving for a new, lower P (reduce payment).
The UK Overpayment Allowance and Early Repayment Charges
Unlike a standard variable-rate mortgage with no restrictions, most UK fixed-rate (and some tracker) mortgage deals come with an Overpayment Allowance — typically 10% of the outstanding balance per calendar year — that you can repay early without penalty. Overpay within that allowance and there's no extra charge. Overpay beyond it, and you can trigger an Early Repayment Charge (ERC), usually calculated as a percentage of the amount that exceeds your allowance — commonly somewhere between 1% and 5%, depending on the lender and how many years remain on your current fixed or tracker deal (the percentage often steps down the closer you get to the end of the deal).
This is the UK equivalent of the legal caps Spain applies under its mortgage credit law: both exist to limit how much a lender can charge you for paying off debt early, but the UK's allowance works deal by deal rather than through a single nationwide legal cap, so the exact terms depend entirely on your mortgage offer. Always check your mortgage illustration or ask your lender for your current Overpayment Allowance before making a large lump-sum overpayment — this calculator does not deduct any ERC from the savings shown.