Updated: Jul 13, 2023
Making additional payments is an effective strategy to reduce debt and save significant interest costs. The frequency and amount of these additional payments can be tailored to your comfort level. The more extra payments you make, the faster you can become debt-free and start reaping the benefits of saving. Unfortunately, many people shy away from this strategy due to concerns about investing in an unstable real estate market. While this apprehension is understandable, it is short-sighted. Once you have signed the mortgage papers, optimizing your mortgage becomes the only option to minimize your financial burden and alleviate stress. Delaying debt repayment only benefits the mortgage provider, a fact that many need to realize. In contrast, Islamic principles provide clear guidance on interest (riba) and debt management. Timely debt repayment is strongly recommended under Islamic principles, emphasizing the importance of avoiding unnecessary delays. Our tool offers a simple yet invaluable resource for determining the most effective additional payment strategy. It has been successfully utilized by numerous professionals burdened with debt. Using this tool, you can make informed decisions that help you eliminate debt and align with Islamic financial principles. It is crucial to recognize that the fear of over-investing in a fluctuating real estate market should not deter you from implementing an additional payment strategy. You can minimize interest costs and achieve financial freedom by taking proactive steps to pay off your debt. Embracing this approach will not only alleviate the stress associated with debt but also enable you to embrace the principles of Islamic finance wholeheartedly. By making additional payments is a powerful strategy for reducing debt and saving on interest costs. Despite concerns about the real estate market, it is important to prioritize optimizing your mortgage and minimizing delays in debt repayment. Our tool provides valuable insights and guidance, enabling you to decide what aligns with Islamic principles and pave the way for long-term financial benefits. Embracing this strategy will empower you to eliminate debt and embrace a financially secure future aligned with Islamic economic principles.
Enter the additional payment amount (you may choose an additional mortgage payment of 1% to 15% of the Mortgage amount per year as shown above or any other intended amount) along with the mortgage amount and the interest rate. You would immediately see the interest savings and the number of years reduced, which is an easy indication of savings in your interest. The bigger the additional payment you make, the bigger the interest portion you eliminate from your mortgage. For example, The Mortgage amount of $610,000 at a 3.69% interest rate for 30 years of amortization, if an additional payment of $6,100 per year is invested, then potential interest savings will be $111,681 (28%), and the mortgage will finish in 23 years instead of 30 years. If you make an additional payment of $12,200 per year invested, potential interest savings will be $173,996 (44%), and the mortgage will finish in 18 years instead of 30 years. Stop, think, and take your decision. The mortgage interest savings is proportional to the additional monthly payments. However, the savings rate differs every month, which you will learn shortly below.
The savings rate matters when it comes to deciding on the additional payment at which I am going to get the optimum savings at the least investment of additional payments. The additional payment per year is inversely proportional to the rate of savings. The Optimum savings can be found where the two line crosses where it says "Optimum savings point" in the graph below. After the optimum savings, the savings rate goes down drastically even though you are paying a bigger additional monthly payment.
Use our additional payment optimizer calculator to create a table similar to the beside based on your mortgage amount, interest, and amortization period. Although you can create the manual table with pen and paper, it will be best if you use Excel to create a table. The first column, Additional monthly payments, can be created by simply taking the percentage of the Mortgage amount (1%, 2%...70%). Then you will have to use our additional payment optimizing calculator to get the Interest savings and %Interest savings for every additional payment per year. The "Rate of savings" can be calculated by dividing the % interest Savings by % Additional payments per month and then plotting the chart on paper or in Excel to get your Optimum additional monthly payment.
For instance, If you have a mortgage of $610,000 at a 3.69% interest rate for an amortization period of 30 years. If you choose to make 1% of additional payments of the total mortgage amount and it turns out to be $6,100 a year, which will result in interest savings of $111,681 over the amortization period of 30 years. So, the yearly average interest savings will be $111,681/30 = $3,722, resulting in a 60% return on mortgage interest. The CIG (Guaranteed Investment Certificate) and Mutual funds are the two popular types of investments. We cannot compare Mutual funds with Mortgage interest due to their uncertainty on the rate of return. However, CIG has a guaranteed investment return comparable to Mortgage interest. With the CIG, you may earn between 2% to 3% of interest on investments. For example, if we invest $6,100 at the interest rate of 2%, you would earn $1,336 interest in 10 years term. So, you will be saving $1,336/10 = $133.6 per year, which is quite less than the yearly interest savings on an additional mortgage payment, which is $3,722 per year.
DISCLAIMER: We strive to offer users accurate information to the best of our knowledge. However, laws are subject to change; therefore, the user assumes full responsibility and should utilize the information on our website and this tool as a reference per our terms and conditions. If you believe any part of the calculation is incorrect or contains errors, we kindly request your feedback here.