An overpayment is anything you pay on a loan beyond the instalment the contract requires. It can be a fixed extra amount each month or a one-off lump sum. Because interest is charged on the outstanding balance, every pound of overpayment stops earning interest for the lender from that day on, which is why a small regular extra has a large effect over a long term.
Take a £150,000 repayment mortgage at 5% over 25 years. The contractual payment is £876.89 a month and the interest over the full term comes to about £113,000. Pay £100 a month more and the loan is cleared in 246 months instead of 300, four and a half years early, with roughly £23,000 less interest. The lender may instead recalculate a lower monthly payment over the original term; that saves less interest but eases the budget, so check which one yours applies.
Overpayments are rarely unlimited. During a British fixed-rate deal, most lenders allow you to overpay between 10% and 20% of the balance each year without charge, the Financial Conduct Authority found, and charge an early repayment charge on anything above that. In the United States, the CFPB notes that small extra principal payments typically do not trigger a prepayment penalty where a loan has one, though paying off a large share at once can.
An overpayment is gone once made. If you might need the money back, an offset mortgage gives a similar interest saving while leaving the cash in your account.
The loan calculator and the mortgage calculator both take an extra monthly payment, apply it to principal, and show the interest saved and the new payoff date beside the original schedule.