Finds how many months an extra lump-sum payment cuts from a loan and how much interest it saves. The monthly payment stays the same and the term shortens.
A prepayment is a lump sum paid ahead of schedule. Every yen of it goes straight onto the principal, which means all the interest that principal would have accrued simply vanishes.
In the term-shortening version, the monthly payment stays the same and the loan ends sooner.
A balance of 20,000,000 at 1.5%, with 25 years left. You pay an extra 1,000,000.
You paid 1,000,000 and got 439,000 back. Since the money you retired was borrowed at 1.5%, this is the exact equivalent of a guaranteed 1.5% return — with no market risk at all.
The benefit is proportional to how much time remains.
What disappears is the future interest on that principal. Killing 25 years of future interest is nothing like killing five. The same 1,000,000 paid late in the loan saves a fraction of what it saves early.
If you are going to do it, do it early. That is the whole rule.
Purely to minimise interest, shortening the term wins. If cash flow is the pressing problem, the other choice has its place.
Do not empty your cash reserves.
Money handed to the bank does not come back. School fees, illness, redundancy — without cash you end up borrowing again at a far worse rate. Keep something like six months of living costs untouched.
Also, where mortgage interest relief applies, cutting the balance can cut the relief. If the tax break is worth more than the interest, there is no hurry.