If I borrow 100k at 5% interest, and to be paid back in 5 years, why is it not that case that I just pay 21k per year and would have paid 105k after 5 years? I heard that if I pay back a little extra every year, it will help to go pay off the interest first, what does that mean? If I owe a set amount of money on fixed interest, how can the total amount change?
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Your mortgage comes with preset duration, interest rate and monthly installments. The instalments are calculated in a way that if interest rate or duration doesn’t change, you’ll be able pay off the principal and interest completely in the agreed duration.
Since the interest is being accrued on a daily basis, paying some extra reduces the total payable by a little bit (doesn’t matter whether it’s principal or interest, as mortgage also includes interest on interest).
Paying a little extra every month helps reduce the amount payable and if you do it frequently enough, you can pay off the mortgage fairly quickly and with less overall interest.
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