Is it worth paying off your mortgage early?

What does paying off a mortgage early involve?

Paying off a mortgage early means making a one-time or recurring extra payment toward the principal balance. As a borrower, you pay the bank a portion of the principal beyond your standard monthly installment, which reduces your debt and, consequently, the interest you owe.

Many guides recommend paying double your installment, but there is no hard rule. You decide the amount you want to pay toward your mortgage. Ultimately, it depends entirely on your financial capacity and personal preference.

Paying off your mortgage early is a way not only to lower your monthly payments but also to get rid of your mortgage sooner.

Before you pay off your mortgage early

While the idea of paying off your mortgage early makes a lot of sense, I advise against acting impulsively. As with most financial matters, a mortgage does not exist in a vacuum. While paying it off over time increases your security by reducing your debt, you don't want to create problems for yourself in the present.

Before you transfer all your savings to the bank, consider the following:

• How much in savings do you already have? Everyone should have at least a minimal safety net, equivalent to several months of expenses. This cushion is especially important when your debt is a significant part of your household budget. If you lose your job, the mortgage still needs to be paid—and how can you do that without income? That is what savings are for! Having this security prevents you from falling into a debt spiral.
• How much do you save each month? Regularly paying off your mortgage with small amounts will take years, perhaps even over a decade. Don't fall into the trap of paying off your mortgage at all costs, as this will affect not only your security (as mentioned above) but also your quality of life. Otherwise, instead of enjoying your new home, you will only associate it with a burden and an unpleasant chore, rather than a place where you can spend the best years of your life.
• Do you have other debts? First, pay off more expensive obligations, such as payday loans, consumer credit, overdue taxes, and others, which, although smaller in amount, can easily turn into major problems.

Is it worth paying off a mortgage early?

Absolutely! Paying off a mortgage early is undeniably profitable because you reduce the principal on which interest is calculated. Of course, it may not always be the most advantageous financial decision, but that depends on your circumstances. If you have higher-interest debt, pay that off first.

There is also a common argument that it is better to invest than to pay off a mortgage early. That such a low interest rate can be beaten by anyone... This is not true, and such a bold assumption falls apart when confronted with reality.

If your mortgage has an annual interest rate of 5%, it doesn't mean you only need to earn 5% on your investments. Many people forget about the so-called Belka tax right from the start—the 19% capital gains tax. So, to break even, you don't need to earn 5%, but 6.17%!

5% / 0.81 = 6.17%

Paying down your mortgage early carries no risk. You make a payment and immediately receive a "return" in the form of reduced interest. When investing, you might not only earn a lower return but also lose money.

Are you able to invest and achieve such a return with low risk, year after year? I doubt it—contrary to online bragging, only a minority of investors make money consistently.

Setting aside your investment skills, you are simply shortening the period of exposure to variable interest rate risk. WIBOR won't stay put, and that 6.17% needed to break even could easily climb above 10%. What then?

Paying down your mortgage is simply safer, although if you can consistently achieve better results—for example, by investing those funds into advertising for your own business to generate extra profit—that would be the better choice. Decide for yourself.

What is the best way to pay down a mortgage?

What works best for you is a highly subjective matter. The best mathematical outcome doesn't necessarily align with your peace of mind. A mortgage is a huge burden, so it's important that you feel comfortable with how you're handling it.

See what results you get when we compare a few scenarios. A 20-year mortgage for 400,000 PLN with a 20% down payment and a 5% interest rate with equal installments.

• You can pay down your mortgage monthly, or save up cash for larger payments every quarter, every year, or as a one-time lump sum after 10 years.
• You pay down a total of only 60,000 PLN.
• You set aside 500 PLN every month.
• Extra payments either lower your monthly installment or shorten the loan term—2 options in 1 table.
• The total interest without any overpayments is 233,557.51 PLN.

The law allows banks to charge a 3% early repayment fee only during the first 3 years. Fortunately, this is not a common practice, and some banks waive this fee entirely. I have not included this cost in the table.

*Overpayment shortens the loan term instead of reducing the monthly installment amount.

The table clearly shows that every overpayment will save you a specific amount. The more regular your payments, the more you save, as you are more frequently reducing the principal on which interest is calculated. However, depending on your bank agreement, which may include unfavorable terms such as requiring overpayments to be made in person at a branch, it may not necessarily be worth overpaying your loan every single month.

The difference between monthly overpayments and a single annual one is minor, and you might value your convenience more than spending time traveling to bank branches.

It is also very clear that shortening the loan term results in much greater savings than reducing the monthly installment. And while, mathematically speaking, you save about twice as much, most people are more motivated by a progressively lower monthly payment than by keeping the same payment amount while finishing the loan 3 years earlier.