If you’re wondering whether it’s better to shorten your mortgage term or lower your monthly payments, the short answer is that shortening the term almost always saves you more interest, while lowering your payments gives you more breathing room each month. In an example with €150,000 outstanding over 20 years at a nominal annual interest rate of 3%, making a €20,000 overpayment saves around €14,600 in interest if you shorten the term, compared with around €6,600 if you lower your monthly payments.
However, the decision depends on the stability of your income, your emergency savings, your mortgage type and the fees in your contract. In this guide, we explain how each option works, when each one makes sense and what to check before making a mortgage overpayment.
What does shortening the term or lowering your payments mean?
Making a mortgage overpayment means paying an extra amount to your lender, on top of your regular payments, to reduce the outstanding principal. You then need to decide how that reduction is applied, which raises the question: is it better to shorten your mortgage term or lower your monthly payments?
Shortening the term: same monthly payment, earlier finish
You keep paying the same amount each month, but your mortgage ends sooner. Since you repay the principal over a shorter period, there are fewer months for interest to accrue, which means greater overall savings.
Lowering your payments: same term, smaller monthly payments
You keep the remaining mortgage term, but each monthly payment goes down. You also save interest because you owe less principal, although the savings are smaller. In return, you free up money each month for other expenses or savings.
Why the timing of your overpayment matters
Most mortgages in Spain follow the French amortisation system: a constant payment in which, during the early years, most of the amount goes towards interest. That is why an overpayment has a greater impact the earlier you make it, whichever option you choose.
Practical example: is it better to shorten your mortgage term or lower your payments?
Let’s look at an example. We’ll start with a mortgage on the following terms:
- Outstanding principal: €150,000.
- Remaining term: 20 years.
- Fixed nominal annual interest rate: 3%.
- Current monthly payment: around €832.
- Remaining interest payable: around €49,650.
Suppose you decide to make a €20,000 overpayment. Before doing so, we recommend that you calculate your mortgage payment under each scenario to see the actual impact on your budget.
If you lower your monthly payments
Your monthly payment falls to around €721, a reduction of roughly €111, and you continue paying for 20 years. Total interest falls to around €43,030, giving you an approximate saving of €6,620.
If you shorten the term
You keep paying €832 a month, but finish repaying the mortgage in around 16 and a half years, taking roughly 3 years and 6 months off your mortgage. Total interest falls to around €35,050, so the saving is approximately €14,600, more than twice as much as with the other option.
When each option makes sense
The numbers favour shortening the term, but choosing between a shorter mortgage term and lower monthly payments also depends on your personal circumstances and plans.
When it is better to shorten the term
Shortening the term is usually a better fit if:
- Your income is stable and your current monthly payment is manageable.
- You want to finish repaying your mortgage before retirement.
- Your main goal is to pay less interest overall.
- You have a savings buffer that you will leave untouched.
When it is better to lower your monthly payments
Lowering your payments makes more sense if your income varies, if you expect significant expenses such as children, renovations or a job change, or if your mortgage payment exceeds 35% of your net income. It can also help if you plan to apply for additional financing, because a lower monthly payment improves your debt-to-income ratio and your profile in the lender’s eyes.
Fixed-rate or variable-rate mortgage: how it affects your decision
With a fixed-rate mortgage, you know exactly how much you will save, so the comparison is straightforward. With a variable-rate mortgage, payments are reviewed in line with Euribor: if you expect rates to rise, lowering your payments gives you a safety margin. And if Euribor is low, it is worth considering not only whether to shorten the term or lower your payments, but also whether making an overpayment at that point is worthwhile.
What to check before making an overpayment
Early repayment fees
Spain’s Law 5/2019 on real estate credit agreements limits these fees. For variable-rate mortgages, the maximum is 0.25% of the amount repaid early during the first 5 years or 0.15% during the first 3 years, depending on your contract. For fixed-rate mortgages, the limit is 2% during the first 10 years and 1.5% thereafter. For example, a €20,000 overpayment with a 2% fee would cost you €400, which should be deducted from your savings.
Your emergency fund and other alternatives
Do not put all your savings into your mortgage. It is advisable to keep a buffer covering three to six months of expenses, because you cannot recover the money once it has been used to repay your mortgage. Also, if you can earn a net return higher than your mortgage interest rate, investing may be a reasonable alternative, although it carries more risk than paying off debt.
Tax relief on your main residence
If you bought your home before 2013 and remain eligible for Spain’s national tax relief on your main residence, you can deduct 15% of what you pay each year, up to a maximum eligible amount of €9,040. If your regular payments already reach that limit, an extra mortgage payment will not increase your deduction, which also affects the decision between shortening the term and lowering your payments.
Frequently asked questions about shortening your mortgage term or lowering your payments
Which saves more interest: shortening the term or lowering the payments?
If you focus only on savings, the answer to whether it is better to shorten your mortgage term or lower your payments is clear: shorten the term. By repaying the principal sooner, you pay interest for fewer months. In our example, the saving was more than twice as large.
Can I choose how my overpayment is applied?
With most mortgages, yes. However, check your mortgage deed, as some lenders set minimum overpayment amounts or specific conditions for applying them.
When is the best time to make a mortgage overpayment?
Whether you decide to shorten your mortgage term or lower your monthly payments, the earlier you make an overpayment, the better, because in the early years most of your payment goes towards interest. With fixed-rate mortgages, also take into account the change in fees after the tenth year.
Is it better to make a mortgage overpayment or invest the money?
It depends on your risk tolerance and your mortgage interest rate. Making an overpayment gives you a guaranteed saving; investing may deliver a higher return, but there are no guarantees. Many people choose to combine both approaches.
Can I combine lower payments with a shorter term?
Some lenders allow you to do both in a single transaction. If yours does not, you can alternate: make one overpayment to lower your monthly payments and another, later on, to shorten the term.
How CreditCheck helps you
At CreditCheck, we create your credit profile by combining the information you provide with a transaction report validated by your bank through Open Banking. This gives you a clear view of your income, recurring expenses and actual financial headroom before making decisions such as a mortgage overpayment. We never see your login credentials or access your account, and we comply fully with the GDPR.
With that complete picture, you will find it easier to decide whether to shorten your mortgage term or lower your monthly payments. And if you need new financing or want to improve your existing arrangements, we show you loan and mortgage offers tailored to your circumstances. Creating your profile is free and comes with no obligation.