I’ve heard a few times over the years that one of the disadvantages of making an extra payment against your mortgage, or any other debt, is that saving this way only earns simple interest rather than compound interest.  This is nonsense, as I’ll show with an example. Flawed Reasoning The reasoning behind the claim that paying down a mortgage only earns simple interest goes as follows.  Each month, your payment pays all of the interest plus some of the principal.  Therefore, there is no interest accruing on previous interest, so there is no compounding. This is a tidy little story, but the reasoning doesn’t hold up. An Example Suppose you have 20 years left on your 6% mortgage (in Canada where most mortgages use semi-annual compounding). This makes your monthly payment $1780.47. The second column of the table below shows how your mortgage balance would decline over the coming year. Suppose you decide to pay $10,000 down on your mortgage, but you leave the payments the same...