You have some spare money and want to put it into the loan. The bank asks a question that decides how much you save: shorten the term or lower the payment?
Why the answer is almost always "the term"
Interest is charged on what you still owe, for as long as you owe it. Shortening the term removes the most expensive months — the last ones, where you would keep paying interest on a balance that has already shrunk.
Lowering the payment keeps the same finish date. The debt still falls, but you stay in the loan just as long, and the bank keeps charging for those months.
What it looks like
On a 20-year mortgage of 6.4 million at 21%, an extra 10,000 a month cuts about 8 years and 8 months off the term and saves over 10 million in interest. The same 10,000 spent on lowering the payment saves a fraction of that.
When lowering the payment is still right
When the monthly figure is what threatens you, not the total. If a smaller payment is the difference between coping and missing one, take it — a missed payment costs more than any optimisation.
Two things to check in the contract
- Which option is the default. Many banks apply "lower the payment" unless you say otherwise, because it earns them more.
- How the extra is applied. Some banks only count it on the payment date; money sent earlier sits idle and earns you nothing.
Both strategies are in the mortgage calculator and the loan calculator: add an extra payment, switch between "shorten the term" and "lower the payment", and compare the two totals side by side.