Why does extra repayment save so much interest?

In the financial world of 2026, the focus of many households has moved from maximum borrowing to accelerated repayment. With interest rates stabilizing at levels that are significantly higher than the previous decade, the impact of additional repayments (also known as “overpayments”) on the total cost of a loan is huge. Whether it's a mortgage or a personal loan, every extra euro you repay on top of the mandatory monthly amount has a cumulative effect that goes far beyond the nominal value of that one euro. It's one of the most effective ways to get guaranteed returns on your equity without being exposed to stock market volatility.

The mechanism behind this saving is based on the mathematical laws of compound interest, but in the opposite direction. In this article, we analyse why additional repayments in 2026 are the smartest way to financial freedom.

The immediate reduction in the principal amount

To understand why you're saving interest, you need to look at the structure of your monthly payments. Your monthly amount consists of two parts: interest and repayment. The interest you pay each month is calculated based on the outstanding debt at that exact time.

When you make an additional payment, 100% of that amount goes directly to reducing the principal amount. With a regular monthly payment, in the early years of a mortgage, a large part often goes to the interest rate and only a fraction to the repayment. By “overpayment”, you skip part of the repayment planning, as it were. Because the principal amount decreases immediately, the bank will charge interest on a lower amount the following month. This creates a snowball effect: you pay less interest, leaving more room to repay the principal with your next regular monthly payment, even without making an additional payment.

The effect of the remaining run time

The biggest savings from extra repayments are achieved by the time you take off the loan. In 2026, most mortgages will be annuity. This means that you pay a relatively large amount of interest at the beginning of the term and repay a lot at the end.

Any additional repayment you make now “destroys” the interest obligation that you would otherwise have had to pay over that amount over the entire remaining term. If you repay an additional €1,000 on a mortgage in 2026 with an interest rate of 4% and a remaining term of 20 years, you will not only save that €1,000 in debt, but also the 4% interest you would have paid on that €1,000 each year for two decades. In fact, this makes that initial €1,000 worth a lot more. You shorten the effective term of your loan, so you stop paying interest to the bank earlier.

Risk-free return versus savings

Although the interest rate on savings accounts rose in 2026, it often does not outweigh the interest you pay on your debts. Extra repayments should be seen as an investment with a guaranteed return.

If you put €5,000 in a savings account at 2.5% interest but you pay 4.5% interest on your mortgage, you will actually lose 2% on that same euro. By using that €5,000 for an additional repayment, you will achieve an immediate return of 4.5% (the interest saved). In addition, this return is tax-free. In contrast to investments on the stock market, where you run the risk of price losses, the savings through additional repayment are an absolute certainty. In 2026, this will be one of the few ways a consumer can directly limit the bank's power over their disposable income.

The decline in risk mark-up

A specific advantage of additional repayments in the Dutch market in 2026 is the impact on the risk class of ji mortgage. Banks determine your interest rate partly based on the ratio between the loan and the market value of the home (the Loan-to-Value).

By paying extra, this ratio decreases more quickly. Once you fall below a certain limit (e.g. 90%, 80%, or 65% of the market value), you often fall into a lower risk category. This means that the bank can lower the interest rate on your entire remaining debt. In 2026, an additional repayment of a few thousand euros could cause your interest rate for the entire loan to fall by 0.1% or 0.2%. This reinforces interest savings exponentially, because the benefit relates not only to the additional repaid amount, but to the entire financing.

Fiscal considerations in 2026

Although the mortgage interest deduction was further reduced in 2026, it remains a factor in the savings calculation. Because you pay less interest after an additional repayment, you also get less money back from the tax authorities. Some people use this as an argument not to redeem, but that is a math error.

After all, you will never get 100% of the interest paid back through tax. Even in the highest tax bracket, you still pay most of the interest out of pocket. The net savings through additional repayments therefore always remain positive. In addition, additional repayment reduces your debt in Box 3 (if applicable), which can help you stay under the capital tax exemption. In 2026, with the renewed box 3 taxes based on actual returns, reducing debts became a tax-efficient strategy.

Psychological freedom and lower monthly payments

In addition to the hard math of saving interest rates, additional repayment in 2026 offers enormous psychological protection. With an annuity mortgage, you can often choose between two options after an additional repayment: shorten the term or lower the monthly payments.

If you choose to lower the monthly costs, you will immediately create more breathing space in your monthly budget. This makes you less vulnerable to inflation or loss of income. If you opt for a shorter term, you will save the maximum amount of interest. Both options give you more control over your financial future. At a time when economic uncertainty is the norm, a partially redeemed home acts as a safety buffer that no other investment can match. The interest savings are the reward that the bank gives you for lowering their risk and increasing your equity.

The mechanism of saving interest through additional repayments will be stronger than ever in 2026 due to the combination of higher interest rates and stricter tax rules. Every step you take to reduce the principal amount acts as a catalyst for future wealth.