Reduce Payment vs Reduce Term Calculator
After a lump-sum prepayment, should you lower the monthly payment or keep it and finish sooner? Compare both outcomes side by side.
- Free
- No signup
- Private browser calculation
Extra interest saved by reducing the term instead of the payment
₹25,122
Baseline: ₹1,432.86/month for 20 years.
- Reduce payment — new payment
- ₹1,289.27
- Reduce payment — interest saved
- ₹14,320
- Reduce payment — term
- 20 years
- Reduce term — payment
- ₹1,432.86
- Reduce term — interest saved
- ₹39,442
- Reduce term — time saved
- 3 years 5 months
Keeping the payment unchanged and reducing the term saves an estimated ₹25,122 more interest, while reducing the payment improves monthly cash flow by approximately ₹143.60.
Neither option is universally better: the term reduction maximises the saving; the payment reduction maximises flexibility.
These estimates are for general planning only and are not mortgage approval, lending, tax, legal or financial advice. Actual rates, fees, taxes, insurance costs and lender decisions may differ.
Assumptions and conventions
- Per-period rate = nominal annual rate ÷ payments per year (standard quoted-rate convention). Reducing-balance method.
- The lump sum is applied with the next monthly payment; any fee is paid separately and subtracted from both savings.
- Reduce-payment keeps the original payoff date; reduce-term keeps the original payment.
- The rate stays fixed for the remaining term.
- Values are calculated at full precision and rounded for display; columns may differ from totals by a small rounding amount.
The decision this tool clarifies
When you make a lump-sum prepayment, most lenders offer two treatments. Reduce the payment: the required payment is recalculated over the unchanged remaining term, freeing monthly cash flow. Reduce the term: the payment stays the same and the loan simply ends earlier, which avoids more interest.
The two options cost meaningfully different amounts over the life of the loan. This calculator runs the full schedule for each and states both the extra interest saved by keeping the payment unchanged and the monthly cash-flow gain from reducing it — so you can weigh saving against flexibility rather than guessing.
Formula
Both options first apply the lump sum to the balance at the next payment. Reduce-payment then recalculates: new payment = reduced balance × i ÷ (1 − (1 + i)⁻ᵐ) over the m remaining scheduled payments. Reduce-term keeps the original payment and amortises the reduced balance until it reaches zero, which happens early.
Interest saved for each option = interest on the original schedule − interest on that option's schedule; an optional prepayment fee is subtracted from both savings.
Assumptions
- The interest rate stays fixed for the remaining term.
- The lump sum is applied with the next payment; the prepayment fee (if any) is paid separately.
- Reduce-payment keeps the original payoff date; reduce-term keeps the original payment amount.
- Per-period rate follows the selected country's convention.
- Whether both treatments are offered, and on what terms, depends on your lender.
Content and formulas reviewed on 2026-08-06. See our methodology for how calculations are built and tested.
Worked example
A 200,000 balance at 6% with 20 years remaining has a payment of about 1,432.86. Prepaying 20,000 and reducing the payment lowers it to about 1,289.27 — roughly 144 a month of breathing room — while the loan still runs 20 years.
Keeping the payment at 1,432.86 instead clears the loan about 3 years early and saves several thousand more in interest than the reduced-payment route. The calculator reports both figures exactly for your numbers.
Frequently asked questions
Which option is better?
Neither is universally better. Keeping the payment unchanged and reducing the term saves more estimated interest; reducing the payment improves monthly cash flow. If your budget is tight or your other debts cost more, the cash flow may be worth more than the interest saving.
Will my lender recalculate the payment automatically?
Practices differ. Some lenders default to keeping the term and lowering the payment (sometimes called a recast, occasionally with a fee); others default to keeping the payment. Tell your lender explicitly which treatment you want.
Does the timing of the lump sum matter?
Yes — the earlier in the term, the larger the interest effect, because the prepaid principal stops accruing interest for longer. This tool applies the lump sum at the next payment.
What if the lump sum nearly clears the mortgage?
Both options converge: the remaining balance is small, so the recalculated payment is tiny and the shortened term is very short. The schedules still resolve exactly to zero.
Is a prepayment fee worth paying?
Compare the fee against the interest saving shown for each option: the calculator subtracts it from both. If the net saving is small or negative, prepaying may not be worthwhile until the fee no longer applies.
These estimates are for general information only and are not financial, tax, legal, or investment advice. Rates, fees, and lending rules vary by lender and country. Actual costs and outcomes may differ from the projections shown.