How does paying off a mortgage early save money?
Interest is charged every month on the remaining balance. When you prepay part of the loan, the balance drops at once, so every following month carries less interest. The calculator rebuilds the amortization schedule month by month, with and without your prepayment, and shows the difference.
The earlier you prepay, the more you save: in the first years of a mortgage, most of each payment is interest. Late in the loan, most of the interest has already been paid and a prepayment saves much less.
Keep the term or keep the payment?
- Keep your payment: you keep paying the same amount and the loan ends sooner. This saves the most interest. In the US and Canada, extra payments usually work this way by default.
- Keep your term: the end date stays the same and your monthly payment goes down (in the US this is called a recast, which lenders may offer for a small fee).
Extra payments every year
Choose "Extra payment every year" to model a yearly lump sum, such as a bonus or a tax refund. Set when the first one is made and how many you plan (0 to continue until the loan is paid off). Check your contract for limits on how often and how much you can prepay.
Prepayment penalties by country
| Country | Usual rule for a home loan |
|---|---|
| United States | Most mortgages have no prepayment penalty. When allowed, it is capped at 2% of the amount prepaid in the first two years and 1% in the third year, and banned after that. |
| United Kingdom | An early repayment charge (ERC), often 1% to 5%, applies during the initial fixed or tracker deal. Most lenders let you overpay about 10% of the balance each year without a charge. |
| Canada | Closed fixed-rate mortgages: the higher of three months' interest and the interest rate differential (IRD). Variable rate: usually three months' interest. Yearly prepayment privileges (often 10% to 20%) are penalty-free. |
| Australia | No exit fees on variable-rate loans taken out since July 2011. Fixed-rate loans can carry a break cost when rates have fallen since you fixed. |
| France | Capped at the lower of 6 months' interest on the amount repaid and 3% of the outstanding balance. |
General rules for residential mortgages. Your loan agreement may be more favorable and is what applies.
Example
On a $300,000 mortgage at 6.5% over 30 years, a single $20,000 prepayment after 5 years, keeping the same payment, pays the loan off 3 years and 10 months early and saves about $69,000 in interest, with no penalty on most US loans. Change the values to see your own numbers.
Frequently asked questions
Should I pay off my mortgage early or invest?
Prepaying gives a guaranteed return equal to your mortgage rate. If you can reliably earn more elsewhere after tax, investing may come out ahead. Keep an emergency fund first: money paid into a mortgage is hard to get back.
How is a prepayment penalty calculated?
It depends on the country and the loan. Common methods are a percentage of the amount prepaid (US, UK), a number of months of interest (Canada, France, Belgium) or an interest rate differential on fixed-rate loans (Canada, Switzerland, Australia). Select your country to see the rule used.
Does a lump-sum payment lower my monthly payment?
In most US and Canadian mortgages, no: the payment stays the same and the loan ends sooner. To lower the payment, ask your lender for a recast. Choose "Keep my term" to see the new payment.
Is this calculator exact?
It gives an estimate for a fixed-rate loan, excluding taxes, insurance and escrow. Ask your lender for a payoff statement before making a large prepayment.