The Core Difference

Homeowners often wonder whether it's better to save up for a large annual lump sum payment or to add a little extra to their mortgage every month. The answer lies in how interest is calculated.

The Mathematical Advantage of Early Payments

Mortgage interest is typically calculated daily or monthly based on the outstanding balance. Therefore, the earlier you reduce the principal, the more interest you save.

• Scenario A (Lump Sum Early): If you pay a $2,400 lump sum in January, your principal is reduced immediately. You save interest on that $2,400 for the entire year.
• Scenario B (Monthly): If you pay $200 extra each month, you only reduce the principal gradually. By June, you've only reduced it by $1,200.

Mathematically, a lump sum paid earlier in the year will always save more money than the same amount spread out over the year.

The Psychological Advantage of Monthly Payments

However, mathematics isn't everything. For many households, finding a $2,400 lump sum is difficult, whereas adding $200 to the monthly budget is manageable.

• Automation: Monthly overpayments can be automated, ensuring you don't spend the money elsewhere.
• Cash Flow: It's easier to absorb a small monthly hit than a large sudden expense.

Legal Considerations

Always check your lender's policy on lump sums. Some lenders have strict rules on when lump sums can be applied or may charge fees if the lump sum exceeds your annual overpayment allowance.