Paying extra on every installment vs. making a lump-sum payment once a year: Which is faster?

"Making extra principal payments" (or *po-ban*) is a strategy to pay off a house loan faster. Between making extra payments with every installment versus making a single large extra payment once a year—which method saves more on interest and results in lower total costs? Let’s look at a comparison table to see which approach clears the debt sooner.

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Making extra principal payments is a way to pay off your house loan faster.

Simply put, this method involves paying more than the scheduled installment amount specified in your loan agreement. By paying extra, a larger portion of the money goes toward reducing the principal balance directly. This strategy effectively accelerates the repayment process and genuinely reduces the total interest paid over the life of the loan.

However, there are different ways to execute this. You can spread the extra payments out by adding smaller amounts to each regular installment, or you can make a single, larger lump-sum payment once a year.

Although the total amount of extra money paid is the same in both scenarios, the outcomes differ. Let’s examine the comparison table below to see how each method impacts your house loan repayment. The comparison example involves a house loan of 3,500,000 Baht with a 30-year term (360 installments), focusing specifically on the first two years (installments 1–24) at a fixed interest rate of 3% per annum. While the repayment amounts for the first year (installments 1–12) are identical for both options, a difference arises in the second year:

– Option 1: The installment amount is increased for every payment in the second year (installments 13–24) compared to the amount paid in the first year (installments 1–12).

– Option 2: The installment amount increases significantly only for the final payment (installment 24).

Although the total amount paid in excess of the minimum requirement is the same for both accelerated repayment options, the timing of these payments differs. This results in variations in the outstanding loan balance and the total interest paid by the end of the 24th installment.

This comparison utilizes the "reducing balance" repayment method—a concept previously explained in our article, "Understanding the Reducing Balance house Loan Repayment Method." __________________________________________

Option 1: Making extra principal payments with every installment

For a house loan of 3,500,000 Baht, the monthly installment is 10,500 Baht during the first year (installments 1–12). In the second year (installments 13–24), an additional 3,000 Baht is paid with every installment, bringing the total payment to 13,500 Baht per month. The total extra amount paid over the 12 installments of the second year is 36,000 Baht. A fixed interest rate of 3% per annum applies throughout this two-year period.

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Option 2: Making an extra principal payment once a year

For the same loan amount of 3,500,000 Baht as in Option 1, the monthly installment is 10,500 Baht during the first year (installments 1–12). In the second year, the payments for installments 13–23 (11 installments) remain at the original 10,500 Baht.

However, an additional 36,000 Baht is paid during the final installment of the second year (installment 24)—an amount equal to the total extra payments made in Option 1.

This brings the total payment for the 24th installment to 46,500 Baht. A fixed interest rate of 3% per annum applies throughout this two-year period.

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Who is suitable for making extra payments every installment versus once a year?

Paying off a mortgage faster by making extra payments with every installment is suitable for individuals with relatively stable income and expenses. This allows for relatively accurate financial planning, meaning there is little risk in setting aside funds to make extra payments on the principal during each installment period. This approach is generally superior to waiting for a single large lump sum—such as an annual bonus—to make a bulk payment against the debt.

Conversely, the strategy of making large lump-sum payments is better suited for individuals with irregular or inconsistent income, such as salespeople or freelancers. Since these individuals typically receive wages or commissions only upon completing a job or closing a sale, they may not be in a position to make extra payments during every installment cycle.

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Ultimately, both methods demonstrate the value of making extra payments toward the principal whenever possible—whether through frequent, smaller additional payments or occasional, large lump-sum payments. Both strategies effectively reduce the outstanding debt balance and yield clear, tangible results.

However, if you encounter difficulties making your mortgage payments, you should consider sticking to the standard payment schedule or applying for a debt repayment holiday; further information is available from the Bank of Thailand.

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Special thanks to DD-Property for this useful information.