Skip to content 
Additional mortgage payments may considerably impact your loan, allowing you to pay it off faster and save on interest. Here at Sire Finance, we can help you understand the potential benefits and difficulties of making two extra payments each year.
Here’s what happens and how this step may influence your financial state.
What Happens When You Make Extra Mortgage Payments?
Making extra mortgage payments will help you to drastically cut the loan term and lower the overall interest paid. This proactive approach is a smart way to pay off your mortgage faster, freeing up your finances earlier.
This could be a great approach if you want more control over your debt and a better long-term financial situation.
Benefits of Making 2 Extra Mortgage Payments a Year
Paying two extra payments annually is a strategy some homeowners use to accelerate mortgage payoff and save on interest. However, this decision has advantages that can improve your long-term financial health.
1. Shortened Loan Term
Making two additional payments annually directly reduces the principal balance of your mortgage. Because interest is calculated on the remaining principal, this shortens the term of your loan. To illustrate the point, consider a 30-year mortgage.
By making two additional payments per year, you can reduce the loan term by several years, depending on the loan balance and interest rate. Shortening the loan term expedites the process of becoming a homeowner. With fewer years of payments ahead, you remove the psychological burden of long-term debt.
Furthermore, the earlier the mortgage is paid off, the more disposable income you will have to allocate to other financial goals, such as saving for a vacation, investing in stocks, or building a retirement fund. This early payoff frees up resources for a more adaptable financial future.
2. Interest Savings
The most immediate and tangible benefit of making extra payments is the reduction in interest paid over the life of the loan. Interest on a mortgage is front-loaded, meaning a larger portion of your early payments goes toward paying off the interest rather than the principal.
By making two extra payments a year, you’re accelerating principal reduction. The faster you pay off the principal, the less interest you will accrue because future interest calculations are based on the remaining balance.
For example, on a 30-year mortgage of $300,000 with a 4% interest rate, paying two extra monthly payments could save you tens of thousands in interest. The additional payments help to reduce the mortgage balance faster, which has a compound effect on interest savings.
Early in the loan, these savings are especially significant because they prevent interest from accumulating on the larger initial balance.
3. Improved Financial Flexibility
Paying down your mortgage faster increases your overall financial flexibility. With fewer fixed monthly expenses, you can redirect your income toward wealth-building strategies, such as investing in the global stock market, increasing pension contributions, or saving for future significant expenditures.
In markets such as the UAE, where residents often have the chance to invest in local and international assets, early mortgage repayment provides the flexibility needed to diversify one’s portfolio. For instance, paying off your mortgage early could allocate AED 6,000 per month to lucrative investment opportunities, such as stocks, bonds, or emerging markets in Europe or Southeast Asia.
Getting rid of your mortgage early could also allow you to refinance at a lower rate if interest rates go down. This could result in lower monthly payments and greater financial flexibility.
4. Increased Equity
Making extra payments accelerates the accumulation of equity in your home, which is the difference between the current market value and the outstanding loan balance. The more you pay the principal, the more equity you gain in the property. Having more equity gives you financial leverage.
For example, in the UAE, where real estate markets can be highly dynamic, building equity faster can give you better opportunities for refinancing or obtaining home equity loans at favorable terms. If you make consistent extra payments, you could reach a point where you have 40–50% equity in your home much earlier than expected.
The result strengthens your position for future investments and increases your chances of securing better loan terms.
Additionally, if property values appreciate, higher equity could mean more profit when you decide to sell, as you’ll have a smaller mortgage balance to pay off, leaving more money in your pocket.
5. Potential for Early Mortgage Payoff
The most compelling reason to make extra payments is the prospect of paying off your mortgage early. This strategy has the potential to significantly impact many markets, such as the UAE, where individuals are constantly seeking methods to reduce their debt.
For example, on a 30-year mortgage for AED 2,000,000 at a 3.5% interest rate, making two extra payments each year could reduce your loan term by 5–6 years. Such an action eliminates your monthly mortgage payment much sooner and gives you the option to redirect those funds toward new financial goals.
Imagine having paid off your mortgage by the age of 50 rather than 60. That financial freedom opens up a world of opportunities, whether it’s investing in new ventures, retiring earlier, or simply enjoying life without the weight of long-term debt.
An early mortgage payoff provides peace of mind. You will experience less financial stress knowing that your property is fully owned without the obligation of making monthly payments. In the UAE, where many residents strive for financial independence and wealth, paying off your mortgage early can be an effective tool in achieving that goal.
Drawbacks of Making Extra Mortgage Payments
While paying more on your mortgage can provide significant benefits, there are also potential drawbacks. Weighing the potential risks and drawbacks of this strategy is crucial prior to determining whether to make two additional payments yearly.
Consider these important challenges:
1. Prepayment Penalties
If you choose to pay off your mortgage earlier than you had intended, you may be subject to prepayment penalties. These penalties are intended to protect the lender from losing out on interest payments if you pay off your mortgage faster.
While not every mortgage contains this clause, it is critical to carefully review your loan agreement before making additional payments. In some cases, these penalties can outweigh the benefits of reducing your loan balance sooner.
Before you make any extra payments, it’s worth checking whether your mortgage includes such penalties. They can add up quickly, especially on larger loans. If they do exist, you’ll want to weigh whether the interest savings are worth the penalty costs—sometimes, sticking to the original schedule might actually be the better move.
2. Inflation and the Cost of Money
Inflation is another factor you’ll want to keep in mind. Over time, the value of money tends to shrink, meaning that the purchasing power of your extra mortgage payments could drop as prices rise.
To put it simply, the funds you’re putting toward your mortgage today might not go as far in the future, especially if you could use them in other places where they’ll grow faster, like stocks or real estate.
If inflation is running high, you might find that investing those extra payments elsewhere makes more sense than paying down the mortgage faster. Of course, it all depends on your financial goals. But it’s something to consider—what you’re saving on interest today might not be worth as much in the long run if inflation is eating away at the value of your extra payments.
3. Opportunity Cost
Opportunity cost is about your choices and the benefits you might miss if you choose one course of action over another. When you allocate additional funds to your mortgage, you may be forfeiting the opportunity to allocate that money to investments that could generate a better return.
For example, the UAE’s real estate market has been a strong performer for years. Alternatively, you could invest that money in stocks, a retirement fund, or a business venture. These potential returns may outweigh the interest savings that result from paying down your mortgage early.
Consider the potential sacrifices before making additional loan payments. If you’ve got other high-interest debt hanging around or investment opportunities that promise higher returns—whether in the UAE or internationally—it could make more sense to put your money there.
Those options could set you up for better financial growth in the long run.
Strategies for Making 2 Extra Mortgage Payments a Year
If you’ve decided that making two extra mortgage payments a year fits your financial goals, there are a few strategies to make it easier on your budget.
One approach is to divide your monthly payment into 12 smaller installments. Set aside one-twelfth of your mortgage payment each month in a separate account so that when the year ends, you have the entire amount ready for the extra payment. This way, you spread the cost and avoid the shock of a large lump sum.
Another option is to make biweekly payments. By paying half of your monthly mortgage every two weeks, you’ll make 26 half-payments per year, which equals 13 full payments—an extra one over the standard 12-month schedule. If you add another payment on top of this, you’re basically making two extra payments per year.
Whichever method you choose, just make sure it works within your budget. In the UAE, with flexible mortgage terms and varying rates, it’s especially important to assess how these strategies fit with your long-term goals. Regularly reviewing your finances will help ensure that making extra payments remains a smart move.
Considerations before Making 2 Extra Mortgage Payments a Year
Before deciding to make two extra mortgage payments each year, it’s important to assess a few key factors to ensure it fits with your broader financial plan.
-
- Financial Health: Above all, make sure your finances are in excellent shape. In the UAE, where expats may not always have guaranteed pensions, it is crucial to have an emergency fund and contributions to retirement savings before committing additional funds to your mortgage.
- Other Debts: If you have high-interest debts, like credit cards or personal loans, prioritize those first. Paying off higher-interest debts will often offer a better return on your money than extra mortgage payments.
- Liquidity Needs: Additional payments may restrict your capacity to access cash for emergencies by tying up funds in your property. Prior to adopting this approach, ensure that you have sufficient liquid savings. In the fast-paced UAE property market, liquidity can be particularly crucial should unexpected expenses arise.
- Future Plans: If you plan on moving or refinancing soon, paying off your mortgage early might not be the best option. You may not stay in your current home long enough to see the full benefits, especially with the fluctuations in the UAE property market.
Carefully considering these factors will enable you to make an informed choice that supports your long-term financial objectives as well as your immediate needs.
How Much Can You Save with Two Extra Mortgage Payments?
The amount you can save with two extra mortgage payments is determined by various factors, including your loan balance, interest rate, and mortgage length. However, as a general rule, you could save thousands of dollars in interest over the course of your loan for each additional payment you make.
By making two extra payments per year, you can significantly reduce your interest payments and shorten the term of your mortgage.
You can use a mortgage calculator to see how additional payments can save you money. It’s a simple way to see how making additional contributions can reduce your loan balance and interest over time.
Sire Finance’s Mortgage Calculator provides a more precise breakdown. It’s an easy-to-use tool that explains how your extra payments can make a significant difference over time.
How Many Years Do 2 Extra Mortgage Payments Take Off?
Making two extra mortgage payments a year can shave 4 to 6 years off a 30-year mortgage, depending on your loan amount, interest rate, and when you start. For example, you could pay off your mortgage in just 24 years instead of 30.
The key? The sooner you start, the more you’ll save. By reducing your principal early on, you cut down on interest, which speeds up your payoff.
Unlocking the Full Potential of Your Mortgage Payments
Making two additional mortgage payments annually can significantly enhance your financial standing by reducing interest and shortening your loan term, thereby bringing you nearer to a life free of debt. This may provide opportunities for you to diversify your investments in different areas of your financial future.
But it’s crucial to think about your whole financial situation before you dive in. Is this strategy consistent with your overall goals? While paying off your mortgage faster can be beneficial, it’s important to balance it with other opportunities to build wealth.
Sire Finance is here to help you weigh your options and make the best decision for your future. Planning and making decisions that support your financial independence can be made easier with the aid of their financial experts.
