The Magic of Compound Interest When Paying Down Your Mortgage
If you’ve ever read investing advice, you’ve likely heard of the power of compound interest. But did you know the same concept applies in reverse when paying down your mortgage? In this case, the “magic” can work for you—if you use it strategically.
Let’s explore how compound interest works, how it affects your mortgage, and how small changes today can lead to big savings over the life of your loan.
What Is Compound Interest?
Compound interest is often described as “interest on interest.” When you borrow money—such as through a home loan—interest is typically calculated daily and added to your loan balance. Over time, you end up paying interest on your original loan and on the accumulated interest unless you’re regularly reducing the principal.
This is great if you’re investing, but when you’re in debt, it means that slow repayments can cost you significantly more than the sticker price of your home.
Why It Matters for Your Mortgage
Home loans are one of the largest debts most people take on. Let’s say you borrow $600,000 over 30 years at an interest rate of 6.5%. Over the life of that loan, you could end up paying nearly $735,000 in interest alone—more than the original cost of the house!
But here’s where compound interest becomes your secret weapon. Because interest is calculated daily, every additional dollar you pay towards your mortgage reduces the balance sooner and therefore reduces the amount of interest being charged from that day onward.
Even modest extra repayments can make a significant difference.
An Example of the Impact
Suppose you have a $600,000 mortgage with a 6.5% interest rate and a 30-year term. Your regular repayment might be around $3,800 per month. Now, imagine you pay an extra $100 per fortnight—just $50 a week.
Over time, that seemingly small extra repayment could shave over four years off your loan and save you more than $130,000 in interest. That’s the magic of compound interest working in your favour.
Start Early, Save More
The earlier you start making extra repayments—even small ones—the more effective compound interest becomes. That’s because your loan balance starts reducing faster, and the cumulative impact of less interest being charged compounds over time.
Delaying extra repayments by even a few years can significantly reduce the total savings.
Where to Find Those Extra Dollars
It doesn’t take major lifestyle changes to get started. Some simple ideas include:
Rounding your mortgage repayment up to the nearest $50 or $100
Using your annual bonus or tax refund to make lump-sum payments
Contributing part of a pay rise or rental income towards your loan
Setting up an automatic payment on payday for a small additional amount
Flexible Structures Make It Easier
If your home loan includes features like a revolving credit or offset account, you can make lump-sum contributions or reduce your interest without locking away your funds. These structures give you flexibility while still harnessing the power of compound interest.
Talk to your mortgage adviser about whether your current structure is helping or hindering your ability to reduce your loan balance effectively.
Don’t Forget the Emotional Wins
Paying down your mortgage faster isn’t just about the dollars saved—it’s about reducing financial stress, creating freedom, and building long-term security. Watching your loan balance drop faster than expected can be incredibly motivating. It puts you back in control.
Use It or Lose It
Compound interest is always at work—either for you or against you. The good news is, by taking small but consistent steps, you can flip the equation and save thousands (or even hundreds of thousands) in the process.
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