Paying off mortgage early: Reduce installment or reduce term?
💡 Quick Tip
Discover which option saves you more money when you decide to pay off your mortgage early. We explain the math behind reducing the term versus lowering the monthly payment so you can make the smartest decision.
The extra money dilemma
If you receive a bonus or inherit money, paying down your mortgage early is a great financial decision. By returning money early, you avoid paying interest on that capital. But the big question arises: should I lower my monthly payment or shorten the remaining years?
Option A: Reduce Term (The Mathematical Choice)
You keep paying the same monthly amount, but finish paying off the house years earlier.
- Pro: It saves you the most money long-term. By eliminating years of debt, you erase thousands of euros in future interest.
- Con: Your monthly effort remains the same; you won't feel immediate day-to-day cash flow relief.
Option B: Reduce Installment (The Peace of Mind Choice)
You keep paying for the original number of years, but your monthly payment drops.
- Pro: Increases your monthly cash flow. If you paid €600 and it drops to €500, you have €100 extra monthly to invest or combat inflation.
- Con: You save less overall interest than reducing the term because the money is loaned for a longer time.
Which to choose?
The rule is clear: to save maximum money, reduce the term.
However, reduce the installment if your finances are unstable, the mortgage suffocates you, or you want to free up monthly cash to invest in index funds that yield more than your mortgage interest rate.
📊 Practical Example
Practical example with real numbers
You have a €100,000 mortgage for 20 years at 3% interest. You pay €554 a month.
You decide to make a lump sum early payment of €10,000:
- If you reduce TERM: You keep paying €554/month, but finish paying off your house 2 years and 5 months early. You save about €4,200 in future interest.
- If you reduce INSTALLMENT: You keep paying for 20 years, but your monthly fee drops to €499 a month (you have €55 extra monthly). You save about €2,500 in future interest.
The difference is €1,700 in extra savings by reducing the term. Numbers don't lie, though your monthly peace of mind also has a price.
