Extra repayments: how to pay off your home loan sooner

Find out how much you can save in interest over the life of your loan by making extra repayments

04 February 2022|4 minute read

couple standing outside new home

Buying a home is a big commitment. With the average home loan term being 30 years, some homeowners may feel overwhelmed by this long-term debt. Luckily, there are several ways you can pay off your home loan faster so you can own your home outright sooner.

By reassessing your finances, making small tweaks and being smart about your repayments, you could save thousands of dollars in interest and shed years off your home loan.

In this article, we take a look at what extra repayments are, who can make them and how much you could be saving in the long run.

Firstly, what are extra repayments?

Extra repayments are any additional payments made on your home loan on top of your minimum monthly repayments.

How can extra repayments help pay off your home loan faster?

When you make extra repayments, you chip away at the principal amount on your home loan, meaning you take one step closer to paying off your loan and owning your home outright sooner.

Plus, interest is charged on the outstanding principal amount, so the sooner you can pay this off, the less interest you’ll be charged over the life of your loan.

Try out our extra repayments calculator to see how they could impact your home loan.

Is there a cap on the number of extra repayments you can make on your home loan?

This depends on your home loan type and the terms and conditions set out by your lender.

Variable rate home loans will generally give you the flexibility to make unlimited extra repayments at any time that suits you.

Fixed rate home loans on the other hand typically require you to pay a set amount monthly for a fixed period of time. Making additional repayments on a fixed rate home loan may incur a break fee.

Break fees are charged because when a borrower makes extra repayments on their fixed rate home loan, the lender takes a financial loss.

The lender recovers this loss by calculating it and charging it back to the borrower.

It may be a good idea to check whether you’re on a fixed rate or variable rate home loan with your broker to find out if you’ll be able to make extra repayments.

How do you make extra repayments on your home loan?

There are several different ways you can make extra repayments on your home loan.

You can visit one of your lender’s branches or give them a call to schedule a repayment or set up a direct debit account.

Alternatively, you can use phone or internet banking to make scheduled repayments at a time of your choosing, without setting up recurring payments.

When setting up recurring repayments, it may be a good idea to align them with your paydays. That way, you’ll be less likely to miss a payment due to insufficient funds.

Can you redraw money from your extra repayments?

Yes, you can. Whether it’s to free cash flow for a renovation, holiday, or to cover an unexpected expense, it is possible with a redraw facility.

Redraw facilities give you the ability to access additional home loan repayments outside of the required minimum repayments. This feature is typically available for all variable rate home loans, but not fixed rate home loans.

Keep in mind, some lenders may charge activation or account keeping fees and a fee each time to access your redraw facility, so it may be worth calculating if the costs associated are worth it for you.

Alternatively, you can use an offset account – which is essentially a savings and transactions account – to reduce the amount of interest you pay on your home loan.

For example, if you have a $500,000 home loan and $60,000 in your offset account, you’ll only be charged interest on $440,000.

Offset accounts don’t charge you for redrawing money, but usually charge a yearly fee to operate. So, it’s important to calculate whether your interest savings will outweigh the account fees.

Is it better to make a large lump sum or extra repayments?

Both a large lump sum and extra repayments are great ways to get you closer to your goal. They will both help you own your home outright sooner.

However, it might not be the best idea to keep putting money aside, hoping later down the track you can make a large lump sum payment.

Why? Because contributing extra towards the end of your loan would mean you’d have already paid a significant amount towards interest.

If you have growing savings sitting in your bank account, it might be a good idea to put them in an offset account instead.

An offset account is essentially a transactional savings account that’s linked to your home loan. Any money put into this account offsets your loan amount, reducing the interest charged in your home loan.

For example, if you have an outstanding loan balance of $300,000 and $50,000 in your offset account, you’ll only be charged interest on $250,000.

Just make sure you do the maths and calculate whether your savings in interest outweigh the fees associated with having an offset account.

If you happen to come into a bit of extra cash, for example a tax refund or inheritance, a lump sum payment can help cut a significant amount off the principal on your loan.

If this isn’t feasible with your current budget, making extra repayments whenever you can also helps.

Either way, as soon as you have the extra money, it’s a good idea to take action. The earlier you’re able to contribute funds, the faster you’ll be able to minimise your principal and interest on principal.

Interest is charged daily, so more frequent repayments can help reduce the interest paid overall.

How much can you save on your home loan by making extra repayments?

Something as simple as switching from monthly to fortnightly repayments can help you pay off your home loan sooner.

This is because there are 12 months per year but 26 fortnights per year. If you switch to fortnightly repayments, you pay an equivalent of 13 months’ worth of repayments per year.

For example, let’s say the monthly repayments on your home loan are $1,600. This would equal $19,200 paid per year. Instead, if you paid fortnightly repayments of $800, this would equal $20,800 – an additional $1,600 paid off your home loan per year, without increasing your repayment amount.

Extra repayments will take this up a notch so that you can pay off your home loan and own your home outright sooner.

For example, let’s say you have a $500,000 home loan with a 30-year loan term and a 2% interest rate. This would make your monthly payments $1,848 and you would pay a total of $165,318 in interest over the life of your loan.

If you made an extra repayment of just $100 per month, you could save $12,302 in interest and shave 2 years and 1 month off your total loan term.

If you’d like to find out how much in interest you could save, as well as how much sooner you could own your home outright, use our extra repayments calculator.

If you’d like to know more about extra repayments and how you can pay off your home loan sooner, get in touch with your local Aussie Broker today.

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