What it means
A standard mortgage has a fixed monthly payment that covers interest and a small slice of principal, which is the amount originally borrowed. In the early years, most of each payment goes to interest.
An accelerator changes that by adding extra principal, so that the balance falls faster and less interest builds up. There are several common routes.
A borrower can pay a little extra each month, make a lump sum payment from a bonus, or switch to payments every two weeks. Because a year has 26 two-week periods, paying half a monthly payment each time results in 26 half payments, which equals 13 full monthly payments rather than 12.
Some lenders and third parties sell formal accelerator programmes, often for a fee. Borrowers should check whether such a service is worth the cost, since they can usually make the same extra payments themselves for free.
They should also read the loan terms for any prepayment penalty, a charge for paying off the loan early. The decision is a trade-off.
Money used to pay down a mortgage earns a certain return equal to the mortgage interest rate, but it also becomes tied up in the house and is harder to reach in an emergency. Many advisers suggest building an emergency fund and comparing the mortgage rate with what the cash could earn elsewhere first.
Tax treatment can influence the choice too. In places where mortgage interest is partly tax-deductible, the after-tax saving from paying early is smaller than the headline interest rate suggests.
Finally, think about flexibility. Some borrowers make extra payments only when cash is plentiful and skip them when money is tight, which keeps the loan on its normal schedule as a safety net.
This approach gives most of the benefit of an accelerator without the pressure of a higher mandatory payment, and it is easy to adjust if circumstances change.
In practice
Real-world examples.
Example
A software engineer receives a $12,000 annual bonus and uses it to make a lump sum payment on her mortgage each year. Her balance falls faster, and she calculates that she will clear the loan several years early. She still keeps six months of expenses in a separate savings account.
Example
A couple switches from monthly to two-week payments on their $300,000 home loan. They hardly notice the change in their budget, but the extra payment each year shortens the loan by a few years. Their lender confirms there is no prepayment charge.
Example
A landlord with a rental property has the choice of using $20,000 to prepay the mortgage or to renovate a unit. The mortgage rate is 5%, while the renovation is expected to raise rent enough to earn about 9%. He renovates, because the return is higher than the interest he would save.
Formula
Calculation
Extra payments per year with a two-week plan = 26 half payments - 12 monthly payments
Approximate first-year interest saved by a lump sum = Lump Sum x Annual Mortgage Rate
Suppose a monthly payment is $1,500. Over a year a monthly payer pays 12 x 1,500 = $18,000. A two-week payer pays half, $750, 26 times, which is 26 x 750 = $19,500. The extra amount paid is 19,500 - 18,000 = $1,500, all of which goes towards principal. Separately, a $10,000 lump sum on a loan charging 6% saves about 10,000 x 0.06 = $600 of interest in the first year.Case study
Seen in the real world.
The Rahman family is an illustrative, fictional household that owed $250,000 on a mortgage at 6%. They were offered a paid accelerator service costing $400 a year that would automatically collect two-week payments.
The family worked out that the service simply added 13 payments instead of 12 a year. They could achieve the same result by adding one-twelfth of a monthly payment to every monthly payment, for nothing.
They declined the service and set up their own standing order for the extra amount. The illustrative lesson is that the mechanism of an accelerator is simple, and the main skill is checking whether you are paying a fee for something you can do yourself.
Watch out
Common mistakes.
- Paying a fee for an accelerator service when the same extra payments could be made directly to the lender at no cost.
- Using all spare cash on the mortgage and leaving no emergency fund, which can force expensive borrowing later.
- Ignoring prepayment penalties, which can cancel out the interest saved by paying early.
Questions
People also ask.
Does paying every two weeks really help?
Yes, because 26 half payments equal 13 full payments, so one extra payment goes towards principal each year.
Should I pay down my mortgage or invest?
It depends on the mortgage rate, your expected investment return, your tax position and your appetite for risk, so compare after-tax figures.
Will extra payments lower my monthly bill?
Usually not, because the payment stays the same while the loan term shortens, unless you ask the lender to recalculate the loan.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related