Compound interest is basically interest you gain on interest.
For example, if you save £100 and you earn 10% per year then after a year you'll make £10 and have £110 in the bank.
After two years though you'll have £121 and after three years £133.
The growth snowballs.
With a mortgage this is reversed, meaning that the debt is reduced more quickly over time.
Even small payments against the capital can grow over time to save you mega amounts of cash over the long term.
Let's say you have a £100,000 35 year repayment mortgage.
If you were to overpay by only £10 per month (only £10!!) you'd save £12541 over the course of the loan and you'd be finished 2 years early.
Now the best way to take advantage of compound interest would be to ensure that 35% of your free cash goes towards the mortgage.
I call this the 35% ratio.
Now say for example the average wage in the UK is £24,000 (net £18,000), I would recommend paying £525 per person (35% of net income) towards the mortgage - £1050 for a couple.
Now apply this to the £100,000 mortgage above.
Making the recommended payment would save the couple a total of £121,916 in interest and knock off 23.
4 years from the loan.
I am going to repeat that again - by paying 35% of your net salary towards your mortgage you will knock off 23.
4 years from your mortgage (paying off the mortgage in only 11.
6years).
Imagine then that you are a FTB at 34.
Your mortgage should be finished by the age of 46 leaving you free to enjoy life.
The bottom line is that any overpayment whatsoever will reduce the mortgage term.
Every overpayment is more snow getting moulded into that ever increasing snowball.