Paying off a mortgage early is one of the few guaranteed returns in personal finance. Every dollar of principal you clear stops attracting interest at your mortgage rate for the rest of the loan, with no market risk.
This guide covers the strategies that actually work, shows what each one is worth on a typical loan, and explains when you should put your money somewhere else first.
Why a little extra goes a long way
All the examples below use the same loan: $450,000 at 6.25% over 30 years, repaid monthly. The standard repayment is $2,770.73, and over the full term you would pay about $547,462 in interest, more than the amount you borrowed.
The reason extra payments are so powerful comes down to how mortgage amortization works. In the early years most of each repayment is interest. Any extra amount goes straight to principal, which lowers the balance that next month’s interest is calculated on. That saving repeats every month for the rest of the loan, so the earlier you start, the more each dollar is worth.
Make regular extra repayments
The simplest strategy is to add a fixed amount to every repayment. Here is what it does to our example loan:
| Extra per month | New loan length | Time saved | Interest saved |
|---|---|---|---|
| $100 | 27 years 3 months | 2 years 9 months | $60,690 |
| $250 | 24 years | 6 years | $127,778 |
| $500 | 20 years 3 months | 9 years 9 months | $203,619 |
An extra $250 a month, about $58 a week, takes six years off the loan and saves nearly $128,000.
The best way to make this stick is to automate it. Increase your scheduled repayment or set up a separate automatic transfer on payday, so the extra goes out before you have a chance to spend it.
Round up your repayment
If a fixed extra amount feels like too much, start by rounding up. Rounding $2,770.73 up to $2,800 adds just $29.27 a month, yet takes 10 months off the loan and saves about $19,537.
Round up to $3,000 instead, an extra $229.27, and you finish in 24 years 5 months, 5 years 7 months early, saving about $119,763.
When you get a pay rise, consider increasing your repayment by part of it. Money you never got used to spending is the easiest money to redirect.
Switch to fortnightly half-payments
Paying half your monthly repayment every two weeks is one of the most popular tricks, and it works for a simple reason: there are 26 fortnights in a year, not 24.
- Monthly: 12 × $2,770.73 = $33,249 a year
- Half every fortnight: 26 × $1,385.36 = $36,019 a year
That is $2,771 more each year, exactly one extra monthly repayment. This is the 13th payment effect. On our loan it clears the mortgage in about 24 years 4 months and saves about $121,629 in interest.
It is the extra money, not the timing. Adding one-twelfth of your repayment ($230.89) to each monthly payment gives almost the same result: 24 years 5 months and about $120,402 saved. Paying more often helps a little because interest is reduced sooner, but the 13th payment does almost all the work.
Two cautions. First, check that your lender actually calculates the fortnightly amount as half the monthly repayment. Some offer a “fortnightly” option that is simply the monthly repayment re-spread over 26 payments, which saves almost nothing. Second, in the US, some third-party biweekly services charge fees for this. You can usually get the same effect for free by making one extra principal payment a year yourself.
Put lump sums to work
Tax refunds, work bonuses, inheritances and the proceeds of selling something you no longer need can all go onto the mortgage.
A single $15,000 payment at the end of year 2 on our example loan shortens it by 2 years 4 months and saves about $64,861 in interest, more than four times the amount you put in. The same lump sum later in the loan saves less, because there are fewer years of interest left to avoid.
The extra repayments calculator lets you test a one-off lump sum, a regular extra amount, or both together.
Use an offset or redraw account
If you are worried about locking money away in your home, an offset or redraw facility lets you reduce interest while keeping access to your cash.
Offset accounts are common in Australia and available from some UK lenders as offset mortgages. They are a transaction or savings account linked to your loan. The balance is subtracted from your loan balance before interest is calculated. With $25,000 sitting in an offset account on our example loan:
- you save about $1,562 in interest in the first year ($25,000 × 6.25%)
- if the balance stays at $25,000, the loan is cleared 3 years 6 months early
- total interest saved is about $116,963
Because interest you avoid is not income, an offset can beat a savings account by a wide margin. On a 30% marginal tax rate, a savings account would need to pay about 8.9% before tax to match a 6.25% offset. Many people run their salary through the offset so every dollar works until it is spent.
Redraw works differently. You make extra repayments into the loan itself and can withdraw them later. The interest saving is the same, but redraw is a feature of the loan, not your own account. Lenders can set minimum withdrawal amounts, charge fees, or change or restrict access, and the money is legally part of your loan. Treat redraw as useful, but not as a substitute for an emergency fund.
In the US and Canada, offset accounts are rare. If you want to cut your monthly payment rather than finish early, ask your lender whether it offers a recast: you pay a lump sum and the lender recalculates a lower repayment over the remaining term.
Refinance, but keep your repayment
Refinancing to a lower rate saves money, but how much depends on what you do with the new, lower repayment.
Say that after three years of our example loan you owe $433,141 and refinance from 6.25% to 5.75%:
| Option after refinancing | Monthly repayment | Remaining loan length | Interest from here on |
|---|---|---|---|
| Do not refinance | $2,770.73 | 27 years | $464,574 |
| New 30-year loan at 5.75% | $2,527.70 | 30 years | $476,829 |
| Keep 27 years left at 5.75% | $2,635.53 | 27 years | $420,771 |
| Keep paying $2,770.73 at 5.75% | $2,770.73 | 24 years 2 months | $368,236 |
Two lessons stand out. Restarting a fresh 30-year term costs more total interest than not refinancing at all, even at a lower rate, because you have added three years of repayments. And simply keeping your old repayment after switching saves about $96,000 compared with staying put, before switching costs.
Use the refinance calculator to check your own break-even point once fees are included, and read our guide to fixed vs variable rates before you lock in the new loan.
Before you pay extra: check your loan
A few minutes reading your loan terms can save you an unpleasant surprise:
- Fixed-rate limits. Many fixed loans in Australia, the UK and Canada cap extra repayments each year, with charges above the limit. Variable loans are usually unlimited.
- Prepayment penalties. Most US mortgages have none, but check your Loan Estimate or closing documents.
- Where the money goes. In the US, label extra payments “apply to principal”. Otherwise some servicers may treat them as an early payment of next month’s instalment.
- Repayment reductions. Some lenders automatically lower your required repayment after a large extra payment. If you want to finish early, ask them to keep your repayment the same.
When not to pay extra on your mortgage
Paying down a mortgage is a good use of spare cash, but it is rarely the first priority. Work through these in order:
- High-interest debt. If you have a credit card at 22%, every $10,000 on it costs about $2,200 a year in interest, compared with $625 a year on a 6.25% mortgage. Clear expensive debt first. Our guide to debt snowball vs avalanche shows how.
- An emergency fund. A common guideline is three to six months of essential expenses in accessible savings. Without it, a job loss or repair bill can push you onto expensive credit. An offset account can do double duty here.
- Retirement contributions with an employer match. If your employer matches your retirement contributions, for example in a US 401(k), the match is an instant return that mortgage prepayment cannot beat. Get the full match before paying extra on the house. The retirement calculator shows the long-run difference.
- Tax-deductible debt. If you also have an investment property loan, it usually makes sense to pay down your non-deductible home loan first and leave the deductible debt in place. Get tax advice for your situation.
- Big expenses on the horizon. If you will need cash soon for a car, a renovation or a child’s education, keep it accessible rather than locking it into a loan without redraw or offset.
Putting it together
You do not need to do everything at once. A realistic plan might be:
- switch to genuine fortnightly half-payments
- round your repayment up to the next hundred
- send tax refunds and bonuses to the loan or offset account
- keep your old repayment if you ever refinance to a lower rate
Each of these is small on its own. Together, they can take years off your mortgage and save a six-figure sum in interest. Start with the mortgage calculator to confirm your current repayment, then test your plan in the extra repayments calculator. For definitions of offset, redraw, recast and more, see the financial glossary.
This guide is general information, not personal financial advice. Rules and products vary by country and lender.