Prepayment Calculator

Why prepayment works

Interest is charged on the outstanding balance, so any amount paid against principal removes every future interest charge that balance would have generated. This is why the saving is far larger than the payment itself: paying 10,000 off a 20-year mortgage early can save two or three times that in interest over the remaining term.

Early beats late, by a lot

The same sum paid in year two saves dramatically more than in year fifteen, because it has more remaining years to avoid interest on. This is the opposite of how most people prepay, which is when a windfall happens to arrive. If you have a choice about timing, earlier is always better.

Reduce the term, not the instalment

After a lump sum, most lenders offer two options. Reducing the term keeps the monthly payment the same and finishes the loan sooner, which captures nearly all of the interest saving. Reducing the instalment lowers the monthly payment while keeping the original end date, which improves cash flow but gives back most of the benefit, because you continue borrowing for the full original period. Unless you need the monthly relief, choose the shorter term.

Check the penalty first

Many fixed-rate products allow overpayments only up to a percentage of the balance each year, commonly 10 percent, and charge an early repayment fee above that. The fee is often calculated on the amount overpaid and can exceed the interest saved, particularly late in a fixed period. Read the overpayment terms before sending money.

Prepay or invest

Prepaying returns a guaranteed amount equal to your mortgage rate, tax-free and risk-free. Investing has a higher expected return with real risk and, depending on jurisdiction, tax. At mortgage rates below roughly 4 percent the argument for investing is reasonable; above 6 percent, prepaying is hard to beat on a risk-adjusted basis. Clear higher-interest debt before either.