How much can I save with extra home loan repayments?
Regularly making extra repayments towards your mortgage can potentially save you thousands of dollars in interest and shave years off the life of your home loan.
Whether you have a fixed, variable or introductory rate loan, the InfoChoice Extra Repayment Calculator shows you how much you could put back in your wallet in the long term by making extra repayments. Simply enter the amount of the repayment, how often you'll be paying it, and when the repayment schedule will start.
Remember, the more you repay and the more frequently you make repayments, the bigger the potential savings.
Why make extra repayments on your home loan?
Variable-rate home loans are popular choices among homeowners due to their flexibility and potential for cost savings. One of those avenues is through making extra repayments. By making extra repayments, you can reduce your loan term, and ultimately lower the amount of interest payable.
Shorten loan term and interest payable
All that extra money you pile into the home loan goes directly to the principal, which could shave months or even years off your home loan duration. The end result is that potentially thousands of dollars could be saved in interest on your home loan. You can use our calculator to find out just how much you could save.
For example, Commonwealth Bank’s latest results indicate around a third of its borrowers are more than two years in advance on their home loans.
Cushion effect of rate rises
As you’re paying a heightened repayment, this acts a good cushion for if interest rates rise. This is because interest rate rises eventually result in extra repayments - but because you’re ahead of the game, this won’t make a difference to your budget.
However more of the payment will go to interest, not principal. Lenders are legally obliged to give at least 21 days' notice from when your interest rate rises before you see a change in repayment if you are making the minimum.
Offset/redraw vs extra repayments on your home loan
The big question is whether to direct extra money into an offset or redraw account, or put it into the home loan as an extra repayment. They all act in reducing your total interest paid but how they get there is different. Here’s a few thoughts:
Offset account: Your money is in a separate bank account to use as you like, and works to shorten the life of the loan and interest payable but it doesn’t reduce your repayment. It may come with an additional fee or interest rate premium.
Redraw facility: Similar to an offset account in that the money works to reduce loan life and interest payable. However it’s not technically your money and you usually need to apply to withdraw it again. Benefit is it’s often a free feature on variable home loans.
Extra repayments: Once you’ve made an extra repayment you can’t withdraw it again if you need funds. It increases your repayment, which could help in cushioning the effect of interest rate rises.
Got a fixed-rate home loan? No worries
While variable-rate home loans provide more flexibility, it isn’t the end of the world if you have a fixed-rate home loan. Many fixed-rate home loans allow up to $10,000 per year in extra repayments, which works out to be more than $190 a week.
However you will need to check with the individual product if it allows you to do this; some lenders might charge a fee. In addition, if you end a fixed-rate home loan early or pay it off in that period, you will likely pay a break cost, which could be thousands of dollars.
Simple ways to make extra repayments
You don’t need to bust your hump to make extra payments; a little bit here and there can help.
Go to fortnightly payments
If you’re making monthly payments, going to a fortnightly payment could increase how much you pay through the year. This is because there are 26 fortnights in a year (13 x four-week blocks) versus 12 months. The end result is the equivalent of nearly one extra month paid into the home loan per year.
Contribute your tax refund or bonus
If you’ve gotten a lump sum, and you don’t need it for other expenses or debts, you could opt to put it into the home loan. It’s best not to even think of it as your money, and funnel it directly in pronto.
Of course, if you have other debts with higher interest rates or immediate expenses coming up e.g. a car repair bill it’s probably better to direct it to those expenses first.
See our lump sum calculator to find out how doing this could help with the interest bill.
Had a pay rise? Contribute that too
It’s very easy when you get a pay rise to adjust your lifestyle upwards to suit. If you’re comfortably managing bills and leisure expenses on your old wage, you could contribute the pay rise portion of your paycheque to the mortgage.
If you earned $100,000 in annual employment income, and it was boosted to $105,000, that’s an extra $126 per fortnight that could go to the mortgage (net and inclusive of Medicare levy in the income tax calculation).
Round-up banking transactions
You might know of quite a few banks or investment options that allow you to round-up your transactions and whack the change in a savings account. However certain products allow you to round-up the spare change directly into a linked home loan.
For example, ING’s Mortgage Simplifier allows you to do this. However in this case you will need a linked transaction and home loan account. If your bank account and home loan are separate you could manually round up, or consider using a bank such as Up Bank that rounds up spare change into a savings account, and direct those funds saved into the home loan.