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Interest is charged on the remaining balance
When an extra payment reduces principal earlier, later interest calculations are applied to a smaller balance.
Future interest falls when principal is reduced earlier
Worked example
An extra principal payment does not merely replace a future payment; it can also reduce the interest that would have accumulated on that principal.
Timing and loan terms matter
The savings depend on interest rate, remaining term, balance, payment timing and whether the lender applies the extra amount directly to principal.
Common mistakes
- Assuming every lender applies extra money to principal automatically.
- Ignoring prepayment terms or fees.
- Comparing savings without using the same remaining loan assumptions.
Frequently asked questions
Do extra payments reduce interest?
They can when they reduce principal earlier in the schedule.
Should I mark the payment as principal-only?
Follow the lender’s instructions so the extra amount is applied as intended.
Is the savings the same for every mortgage?
No. Rate, term, balance and timing all affect the result.