Your Money: Overpaid and overdone

Mortgages: you might not gain by repaying a bit extra, nor might you be seeing the full benefit of rate cuts

With interest rates at their lowest for more than 30 years, many home owners are finding they can afford to pay off a bit extra on their mortgage.

Such a move should be planned carefully. Most lenders will only take account of small overpayments in reducing the amount you owe once a year, which means the extra money you pay could in effect be wasted for as long as 12 months.

Borrowers with fixed-rate or discount deals will be penalised if they make overpayments in the first few years of the loan.

Often the answer is to open a savings account to run in parallel. You can earn interest on whatever spare cash you have in this account until it is appropriate to pay off part of your mortgage.

Most big lenders will require a minimum payment of about pounds 1,000 before they recalculate your outstanding debt and the interest payable.

Any smaller monthly overpayments will not be knocked off the amount you owe until the end of your lender's financial year - usually 31 December.

Hilary McVitty, of the Woolwich, explains: "If somebody just pays us an extra amount each month, that extra money will just sit on the mortgage account for some time doing nothing."

It is essential to let the lender know what your intentions are when you make a larger lump-sum payment. Tell your branch that you intend this as a part-redemption of the mortgage, and therefore expect the capital outstanding and interest due to be recalculated.

There are a handful of specialist loans on the market which let you run your mortgage much like a bank account, making bigger payments when times are good, and reducing payments - or even dropping them altogether for a few months - when cash is tight.

A Bank of Scotland Personal Choice mortgage allows for underpayments, overpayments and payment holidays, as well as giving you a chequebook that lets you withdraw any money you have overpaid to deal with emergencies that crop up.

Say you had a Personal Choice mortgage of pounds 60,000, with monthly repayments of pounds 365. Assume also that you have pounds 5,000 in a building society earning interest of pounds 10 a month.

Switching that pounds 5,000 from the building society to pay off part of your loan would reduce your monthly payments to pounds 332, giving a net saving of pounds 23 a month, or pounds 276 a year. The pounds 5,000 would still be available for you to spend through the loan's cheque-book facility, although taking any of it out would mean increasing your monthly payments again.

This type of loan can be useful for self-employed people or part-time workers, both of whom may find that their cash flow fluctuates through the year.

If you have a fixed-rate mortgage, you will, in effect, be charged a penalty of three to six months' interest on any sums you overpay. In other words, your interest payments will not fall until some time after the overpayment is made.

Most fixed-rate and discount deals apply this penalty for some time after the fixed rate or discount itself has stopped.

For example, Alliance & Leicester's one-year fixed-rate mortgage has an early redemption penalty of six months' interest until the year 2001, despite the loan reverting to their standard variable rate in April 1997.