Yes, paying an extra $1 a day on your mortgage does reduce total interest paid and shorten the loan term due to compound interest working in your favor, but the impact is relatively small (saving a few thousand dollars and a few months) compared to more significant extra payments; it won't magically cut years off a large loan quickly, but it's a simple, consistent way to chip away at principal. The real power comes from more extra payments or strategies like fortnightly payments (paying half your monthly amount every two weeks, creating one extra payment a year) or using an offset account.
The most effective method is making extra payments directly toward the principal. Even small additional payments can cut years off your loan, but if your goal is to pay it off in half the time, you'll need to be aggressive. Ultimately, the best approach depends on your financial situation.
Set up a mortgage offset account
An Everyday Offset account allows you to offset, or reduce, the interest charged on your home loan by letting you pay down the principal loan amount with your savings. An Everyday Offset is a transaction account linked to your eligible variable rate home loan.
Paying an extra $100 a week on your mortgage significantly reduces your total interest paid and shortens your loan term by paying down the principal faster, building equity quicker, and potentially saving you years and thousands of dollars over the life of the loan, but check for fixed-rate penalties and ensure extra payments go to principal, not just interest.
Making your repayments more frequently, such as daily or weekly, won't make a significant difference to your home loan unless you increase the amount you pay, as in the fortnightly repayment example above.
No matter how much extra you pay each month, that amount can help shorten the life of your loan. Even making one extra mortgage payment each year on a 30-year mortgage could shorten the life of your loan by four to five years.
The "2% rule" for mortgage payoff has two main interpretations: either add 2% extra to your standard monthly payment, or, if refinancing, aim to lower your interest rate by at least 2 percentage points (e.g., from 7% to 5%) to significantly reduce interest and pay off the loan much faster. Both strategies accelerate principal reduction, saving years and thousands in interest by tackling high-interest periods early in the loan.
Tips to pay off mortgage early
Overpaying reduces the principal loan amount, which directly impacts the total interest you'll pay over your mortgage term. For example, if you have £150,000 remaining on your mortgage at a 2% interest rate and you overpay by £200 each month, you could save thousands in interest over the life of the loan.
While the possibility of job loss can trigger financial panic, Orman advises against rushing to drain your savings to pay off your mortgage early. Even if you have enough money saved to wipe out your mortgage, don't pull the emergency cord until absolutely necessary.
While it's possible that interest rates could return to 3% territory in the future, it's highly unlikely that it'll happen anytime soon. In fact, some experts say it won't happen again without another major economic shock like the one caused by the COVID-19 pandemic.
A $400,000 mortgage at 7% interest typically costs around $2,661 per month for a 30-year term, while a 15-year term would be significantly higher, around $3,595 per month, excluding taxes, insurance, and fees, with the longer term resulting in substantially more total interest paid over the life of the loan.
The premise is simple: pay an extra 10% of your monthly mortgage payment toward the principal each week, which can allow you to pay off the loan in approximately 15 years while lowering the amount paid toward interest.
Increasing your monthly payments, making bi-weekly payments, and making extra principal payments can help accelerate mortgage payoff. Cutting expenses, increasing income, and using windfalls to make lump sum payments can help pay off the mortgage faster.
Paying just $50 extra every month can knock about two years and more than $15,000 of interest off your total mortgage loan payback. Adding $100 to your mortgage payment every month lets you pay that mortgage off four years early and can save you more than $28,000 over the life of your loan.
Here's an example: If you hypothetically paid an extra $100 per month on a $350,000 30-year mortgage with a 6% interest rate, you could entirely pay off the loan 31 months earlier.
Paying off your mortgage early can be a smart financial move, potentially saving you thousands in interest over the life of the loan. Since the interest charged on debt is usually higher than the returns you'd earn on savings, using spare cash to reduce your mortgage balance can often make good sense.
One of the most common downsides is early repayment charges (ERCs). Depending on your mortgage deal, you may incur a fee for paying extra on your mortgage. This tends to range between 1% and 5% of the amount overpaid.
Making extra principal payments is the primary way to pay off a 30-year mortgage early and reduce the total interest paid. Switching to biweekly payments results in making one additional payment per year, which can reduce your mortgage term by a few years.
Peters explains that the biggest potential downside to an early mortgage payoff is what's called opportunity cost. “If you use extra cash to pay off your mortgage ahead of time, you may miss out on opportunities to invest that money and potentially earn a higher return, especially in a strong market,” he says.
Here are some ways to get rid of your mortgage debt faster.
The benefits of paying off your mortgage
The biggest reason to pay off your mortgage early is that often it will leave you better off in the long run. Standard financial advice is that if you have debts (such as mortgages), the best thing to do with your savings is pay off those debts.
Potential disadvantages of paying off a mortgage
You got locked into a great rate before they spiked—say 3%—and you're not paying a lot in interest. You need to increase your emergency savings. Paying off a mortgage requires you to deplete cash, or liquidity, which may leave you without a cushion.
The rule requires the buyer's solicitor to inform the lender when a seller is attempting to sell the property when the seller was registered at the land registry less than six months prior to the agreed sale. The lender will not usually lend in that case.
Here's how to turn this dream into a reality.