Overpaying a mortgage: shorten the term or lower the installment?

Shortening the term saves more interest than lowering the installment. On a PLN 400,000 loan over 20 years at 5.75%, overpaying PLN 500 a month and shortening the term cuts the interest by PLN 74,692 and the repayment by 4 years and 10 months. The same overpayment used to lower the installment saves PLN 38,954, but the installment falls: after 5 years it is PLN 2,580 instead of PLN 2,808. The snowball method saves as much as shortening the term, and on top of that the installment the bank asks for falls over time.

How much does each option save?

We use the default example from our mortgage overpayment calculator: a PLN 400,000 loan over 20 years (240 equal installments) at 5.75%. That is the NBP reference rate (3.75% since March 5, 2026; the NBP is Poland's central bank) plus 2 percentage points — roughly what a variable-rate mortgage costs today. Without overpaying, the installment is PLN 2,808 and the interest over the whole term comes to PLN 274,001. From the first installment you overpay PLN 500 every month, and the calculator works out three options:

• Shortening the term — the installment stays the same, the overpayments reduce the principal, and so the loan ends earlier.
• Lowering the installment — the term stays the same. After every overpayment the bank recalculates the installment so that the remaining principal is repaid in as many installments as are left until the loan's original end date. So the installment falls every month.
• The snowball method — after every overpayment the bank recalculates the installment as when you lower it, but you add the amount it fell by to your next overpayment. So you pay the same amount every month.

Shortening the term and the snowball method save the most interest, PLN 74,692 each. Lowering the installment saves PLN 38,954. With a lower installment, the loan ends practically on the original date: 2 months early, because near the end the debt is so small that the installment plus the overpayment clears it ahead of time.

"Total paid to the bank" is all the principal and all the interest, overpayments included. The results leave out prepayment fees and changes in the interest rate: the calculator uses one rate for the whole term.

Why does shortening the term save more?

The bank charges interest every month on the principal still to be repaid. The faster the principal falls, the less interest you pay. In both options you overpay the same, PLN 500 a month — the difference is in the installment.

When you shorten the term, the installment doesn't change. The interest falls along with the principal, so a growing part of the same installment repays principal. When you lower the installment, the bank cuts it after every overpayment, and the amount it falls by stays in your budget instead of repaying principal. The principal falls more slowly, and there is more interest to pay.

In the lower-installment option, the installment falls from PLN 2,808 to PLN 2,580 after 5 years, PLN 2,296 after 10 years and PLN 1,869 after 15 years. At the start of the last year of the repayment it is down to PLN 1,069. With the snowball method, after 15 years PLN 3,790 of debt is left, and the bank spreads it over the rest of the original term — another 5 years — so the required installment drops to PLN 73.

The installment plus the overpayment comes to PLN 3,308 at the start, and that's what you pay every month until the loan is repaid, both when you shorten the term and with the snowball method. When you lower the installment, this amount falls with it: PLN 3,080 after 5 years, PLN 2,796 after 10 years and PLN 2,369 after 15 years.

So lowering the installment is a different choice rather than a worse overpayment: you take part of the benefit straight away, as a lower installment, rather than as less interest at the end. In total you pay the bank PLN 599,309 if you shorten the term and PLN 635,047 if you lower the installment.

Does the gap grow with the interest rate?

The same loan and the same overpayment of PLN 500 a month, at 4%, 6% and 8%:

The higher the rate, the bigger the lead of a shorter term over a lower installment: PLN 20,610 at 4%, PLN 38,270 at 6% and PLN 62,284 at 8%. At a higher rate every złoty of principal that stays in the loan longer costs more interest, and when you lower the installment the principal falls more slowly. At 4% a lower installment saves 56% of what a shorter term saves; at 8%, only 48%.

On a variable-rate mortgage the rate moves over the years with WIBOR (the Warsaw interbank rate such loans follow), while the calculator uses a single rate for the whole term. So the table shows the scale rather than an exact result: how much the choice of option matters when rates are low and when they are high.

How does the snowball method work?

With the snowball method the bank lowers the installment after every overpayment, just as with "Reduce installment" in the calculator. But instead of keeping the difference, you add it to your next overpayment.

In the calculator the snowball method gives the same result as shortening the term: PLN 74,692 less interest and a repayment 4 years and 10 months shorter. That's no coincidence: you pay the same every month, and in both cases everything above the interest repays principal.

The difference is in the installment the bank asks for: PLN 2,521 instead of PLN 2,808 after 5 years and PLN 1,921 instead of PLN 2,808 after 10 years. If your income falls, you can stop overpaying and pay just that lower installment.

In return, the overpayment grows: every time the installment changes, you raise it by the amount the installment fell. You start at PLN 500 and overpay PLN 788 after 5 years and PLN 1,387 after 10 years.

In practice, then, the snowball method takes some keeping up with: after every overpayment you check the new installment with your bank and raise the next overpayment by the difference. If you don't, the snowball turns into an ordinary lower installment.

When is a lower installment the better choice?

A lower installment makes sense when what you have to pay every month matters more to you than the total interest:

• Uncertain income. If you expect a break in earnings, your income varies a lot or you worry about losing your job, a lower required installment means a lower fixed cost. When you shorten the term, the installment stays as high as it was at the start, even though the loan keeps shrinking.
• Another loan. A lower installment reduces your monthly commitments, which may help when you apply for another loan.
• Other uses for the money. You can put the amount the installment falls by into an emergency fund (poduszka finansowa) or invest it.

If you can't decide between a shorter term and a lower installment, the snowball method gives you both ways out: as long as you overpay the difference, you repay the loan as if you had shortened the term, and when you stop, you're left with a lower installment.

Whether to overpay at all, rather than invest for example, depends on what you would earn after tax compared with your mortgage rate, and on whether you have an emergency fund. We cover that in the guide "When doesn't overpaying your mortgage pay off?".

What about a one-off overpayment, say from a bonus?

A one-off overpayment — from a bonus, a 13th-month salary or a tax refund — works the same way: you choose whether it shortens the term or lowers the installment. If it shortens the term, the installment stays the same and the loan ends earlier. If it lowers the installment, the bank recalculates it over the remaining term and the following installments are lower. What we say above about the edge a shorter term has over a lower installment applies to a single overpayment too.

Timing matters as well. The bank stops charging interest on the amount you prepay, so the earlier you overpay, the more you save. The same amount paid in the first years of the loan saves more than near its end.

The mortgage overpayment calculator works with a fixed amount every month, not single payments. You can enter a yearly bonus roughly as one twelfth, for example PLN 6,000 a year as PLN 500 a month. The result will be approximate: one payment at the start of the year saves a little more than the same money spread over 12 months, and one at the end of the year a little less.

You can work out a single overpayment made now in the overpay-or-invest calculator, in the "One-off, now" field. It treats it as shortening the term: it shows how much sooner you repay the loan and how much interest you save, and it also compares overpaying with investing the same money.

How do you instruct the bank, and what does it cost?

Poland's Mortgage Credit Act (ustawa o kredycie hipotecznym) lets you repay a mortgage in full or in part at any time before it is due. This applies to agreements signed from July 22, 2017, when the act came into force — older ones follow the previous rules, so check your own agreement for how overpaying works. When you overpay, you choose whether it should shorten the term or lower the installment. Ask your bank how to submit that instruction, and whether once is enough or you need to repeat it with every overpayment.

Before overpaying, you can ask the bank what it will cost. The bank must give you that information within 7 working days of your request. It also can't make accepting your overpayment conditional on providing that information.

The act calls the fee for overpaying compensation (rekompensata). The bank can charge it only if the agreement provides for it, and the limit depends on the type of rate:

• Variable rate — only on overpayments within 36 months of signing the agreement. The fee can't exceed 3% of the amount prepaid, nor the interest that would accrue on it over a year. On an overpayment of PLN 500 that is at most PLN 15.00: 3% is less than a year's interest on it (PLN 28.75 at 5.75%).
• Fixed rate for a period — the bank may claim compensation while the fixed rate applies. Ask how much it will be before you overpay.

Either way, the compensation can't exceed the bank's costs directly related to the early repayment.

Our example is a new variable-rate loan overpaid from the first installment. If the bank charges the highest fee allowed on each of the 36 overpayments in that time, you pay at most PLN 540 in total, against PLN 74,692 saved in interest. Our calculator leaves fees out.