Understanding the mechanics and mathematical principles behind this mortgage acceleration strategy
This page explains velocity banking concepts for educational purposes only. The content is not financial advice. All examples are hypothetical and may not represent actual outcomes.
Always consult with qualified financial professionals regarding your specific situation before making any financial decisions.
Velocity banking is a mortgage acceleration strategy that leverages a Home Equity Line of Credit (HELOC) or similar financial product to make large lump-sum payments toward your mortgage principal. This potentially reduces both the time to pay off your mortgage and the total interest paid.
With a traditional mortgage, most of your early payments go toward interest rather than principal. For example, in a typical 30-year mortgage at 4% interest:
| Year | Monthly Payment | Portion to Interest | Portion to Principal | Remaining Balance |
|---|---|---|---|---|
| Year 1 (First Payment) | £1,527.81 | £1,066.67 (70%) | £461.14 (30%) | £319,538.86 |
| Year 5 (60th Payment) | £1,527.81 | £921.92 (60%) | £605.89 (40%) | £280,742.78 |
| Year 15 (180th Payment) | £1,527.81 | £623.82 (41%) | £903.99 (59%) | £187,147.23 |
This means that in the early years of your mortgage, you're building equity very slowly despite making substantial monthly payments.
Velocity banking tackles this problem by using a HELOC to make large principal payments early in your mortgage term. Here's how it works:
Velocity banking works based on several key mathematical principles:
Most mortgages calculate interest on the monthly balance, while many HELOCs calculate interest on the daily balance. This means every pound of income immediately reduces your interest calculation when deposited to the HELOC.
By making large principal reductions early, you're eliminating years of interest-heavy payments. For example, a £20,000 lump sum payment at the beginning of a mortgage could save over £40,000 in interest over the life of the loan.
By using the HELOC as a banking tool, your income reduces your debt immediately rather than sitting idle in a current account until bills are due.
The chart below illustrates how velocity banking accelerates mortgage payoff compared to traditional payments:
To see how velocity banking might work in practice, let's examine a hypothetical example of a couple implementing this strategy:
For a detailed breakdown of how Mark and Sarah implement velocity banking using a six-month cycle approach, see our Six-Month Strategy page.