Should You Make Extra Mortgage Payments? What 100 a Month Really Saves

Paying a little more than your mortgage asks for is one of the few guaranteed savings on a large debt. How much it saves depends on your rate, your balance and, above all, timing. Here is the maths, with a calculator to run your own numbers.

Original Farvenzo Times line chart of a 250,000 mortgage at 6.5% over 25 years: standard payments clear it in 25 years; 100 extra a month clears it in 21 years 11 months with 37,671 less interest; 200 extra a month clears it in 19 years 6 months with 64,928 less interest. — Original Farvenzo Times graphic, calculated with the Farvenzo Times loan calculator. Works in any currency; no fees or rate changes assumed.

The short answer

Every extra payment that goes straight to the balance stops interest building on that money for the rest of the loan. On a typical 25-year mortgage, an extra 100 a month can cut more than three years off the term and save tens of thousands in interest. A lump sum early in the loan saves far more than the same lump sum near the end.

The figures below come from our mortgage calculator with extra payments. They work in any currency: read them as dollars, pounds, euros or rupees.

Why early payments are so powerful

A repayment mortgage charges interest on whatever you still owe. At the start you owe the most, so most of each payment is interest. Borrow 250,000 at 6.5% over 25 years and the monthly payment is about 1,688. In the first month, about 1,354 of that is interest and only about 334 reduces the debt.

Over the whole first year you pay about 20,256, of which roughly 16,128 is interest and 4,128 is repayment. An extra payment skips that queue. It goes straight to the balance, so every later month charges interest on a smaller amount.

Worked example: 250,000 at 6.5% over 25 years

Without extra payments, this loan costs about 256,405 in interest over 25 years, more than the amount borrowed. Here is what changes when you pay a little more each month:

50 extra a month: about 20,508 less interest, paid off 1 year 8 months sooner.
100 extra a month: about 37,671 less interest, paid off 3 years 1 month sooner.
200 extra a month: about 64,928 less interest, paid off 5 years 6 months sooner.
300 extra a month: about 85,737 less interest, paid off 7 years 4 months sooner.

Each extra 100 a month saves a little less than the one before, because the loan ends sooner and there is less interest left to cut. Your total repayments fall by exactly the interest saved, because the amount you borrowed does not change.

Timing matters more than size

A one-off 10,000 payment made after the first year saves about 34,010 in interest and ends the loan 2 years 2 months early. The same 10,000 paid at the start of year 16 saves about 8,511 and 10 months. The money is the same. The difference is how many years of interest it avoids.

The UK's free MoneyHelper service gives a similar example in its guide Should you pay off your mortgage early?: a £5,000 lump sum on a £250,000, 5%, 25-year mortgage saves £11,970 in interest and clears the loan 11 months early. Our calculator, with the lump sum paid in the first month, gives about 11,954 and 11 months.

A shorter loan or a smaller payment?

When you overpay, some lenders keep your monthly payment the same and shorten the loan. Others keep the end date and lower your payment. Shortening the loan saves the most interest, because the extra money keeps working for every remaining month. Lowering the payment gives you breathing room but a smaller saving. Ask your lender which it does, and whether you can choose.

Check these before you pay extra

Prepayment penalties. The US Consumer Financial Protection Bureau explains that a prepayment penalty typically applies only if you pay off the entire mortgage within a set number of years, usually three or five. In some cases it can apply to a large amount paid all at once. It does not normally apply to extra principal paid in small amounts, but confirm with your lender.

Overpayment limits. In the UK, MoneyHelper notes that many lenders let you overpay up to 10% a year without a charge, and that early repayment charges can apply above your limit. Rules differ by country and by loan, so check your own terms.

Where the money goes. Make sure an extra payment reduces the balance rather than being treated as an early payment of next month's bill. Lenders handle this differently, so ask how to mark it.

When paying extra is not the best move

A mortgage is often the cheapest debt a household has. MoneyHelper suggests clearing more expensive borrowing such as credit cards first, keeping at least three months' expenses in reserve, and considering pension contributions, which can come with tax relief and employer contributions. If a savings account pays more than your mortgage rate, that may also be a better home for spare cash.

If you have card debt, our credit card payoff calculator shows how much faster a fixed payment clears it, and our explainer on the minimum payment trap shows why it usually comes first.

Run your own numbers

Open the mortgage and loan calculator, enter your balance, rate and remaining term, then add a monthly extra, a one-off payment or both. It shows the interest saved, the new payoff date and a full amortization schedule, in your own currency.

Educational content, not financial advice. Check your loan terms with your lender before making extra payments.

Sources

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