Key Takeaways
- Extra repayments reduce your loan principal, which lowers the interest you pay over time and helps you build equity faster.
- Making repayments weekly or fortnightly instead of monthly can result in one extra repayment per year, helping you pay off your loan sooner.
- Making extra repayments monthly on top of your regular payments can also make a big impact on your loan, reducing overall interest and shortening your loan term.
- Lump sum payments, which you can make when you get tax returns or bonuses, can significantly reduce your interest and loan term when applied early.
- Offset accounts and redraw facilities offer flexible ways to make extra repayments while keeping funds accessible if needed.
- Small, regular additional payments (even $50 a week) can save you thousands in interest over the life of your loan.
- Most variable rate loans in Australia allow extra repayments without penalty, but fixed rate loans may have limits or fees.
- The earlier you start making extra repayments, the greater the long-term impact due to compounding interest savings.
Managing your loan effectively can save you thousands of dollars over the years. One of the most powerful ways to take control of your debt and reduce the overall interest you pay is by making extra repayments. Whether you’re a homeowner or a business owner, understanding how and why to make additional repayments can put you on the fast track to financial freedom. In this article, we’ll explain the benefits of making additional mortgage repayments and how best to implement this strategy.
What Are Extra Repayments?
Extra repayments are any payments made towards your loan that are above your required minimum repayments. These can be scheduled as part of your regular payment plan (such as paying more each week or month) or made as lump sum payments when you have spare cash, such as from a tax return, bonus, or savings.
Extra repayments are typically applied directly to your loan principal, reducing the amount on which interest is calculated. Over time, this can lead to substantial mortgage savings and shorten your loan term significantly.
Why Should I Make Extra Repayments on My Home Loan?
Making extra repayments on your home loan or business loan offers a host of financial benefits. Here’s why it makes good financial sense:
1. Reduced Interest Payments
Interest on most loans is calculated daily on the remaining balance. When you make extra repayments, you reduce the principal, which means future interest charges are based on a smaller amount.
2. Shorter Loan Term
Every dollar of extra repayment goes straight to the principal, meaning you’ll pay your loan off faster. Even small, regular extra payments can shave years off your loan term.
3. Build Equity Faster
Equity is the portion of your property you truly own. By paying down your mortgage faster, you’re increasing your equity, which can be beneficial if you want to refinance or sell in the future.
4. Peace of Mind
Paying your loan off faster can provide a psychological boost and financial flexibility. You’ll free up funds for other life goals, like travel, education, or investing.
How Extra Repayments Reduce Home Loan Interest
How do extra repayments save interest? Let’s say you have a $1,000,000 home loan with a 30-year term and an interest rate of 6.0% p.a. Making the minimum monthly repayment will cost you $1,158,382 in interest over the life of the loan.
Now, if you were to make an extra repayment of $500 per month, 1 year after starting the loan, you could save over $226,150 in interest and cut more than 5 years off your loan term.
Imagine what you can do with $226,150 – that’s massive!
Can Extra Repayments Shorten My Loan Term?
Absolutely. The impact of extra repayments on the loan term can be significant. Even modest extra repayments have a compounding impact that not only cuts interest but significantly reduces the time it takes to repay your loan in full.
Using a home loan calculator can help you visualise how much time and money you’ll save. Many Australian banks and financial sites offer free online tools where you can experiment with different repayment scenarios.
What’s the Best Way to Make Extra Repayments—Weekly or Lump Sum or Monthly?
All methods have benefits, and the best strategy often depends on your financial situation:
Weekly or Fortnightly Payments
Switching from monthly to fortnightly or weekly repayments can lead to one extra month’s worth of repayments each year (26 fortnights = 13 monthly payments). This small change alone can cut years off your loan.
Monthly Extra Repayments
If you’re paid monthly or prefer a more straightforward budgeting method, adding an extra amount to your monthly repayments can still be highly effective. By increasing your monthly payment even slightly (say by $100 to $500), you can significantly reduce your loan balance and shorten the term without drastically affecting your budget.
Lump Sum Payments
If you receive a work bonus, inheritance, or sell an asset, putting that money straight into your mortgage or offset account as a lump sum can have a powerful compounding effect on your savings. Even a one-off lump sum of $10,000 early in your loan term can save you thousands in interest.
For maximum impact, consider doing both—set up automatic extra repayments weekly, fortnightly, or monthly and make lump sum payments when you have windfalls.
Strategies to Pay Off Your Home Loan Faster
There are several loan repayment strategies that can help you maximise the benefit of extra repayments:
1. Round Up Your Repayments
Instead of paying $5,700 per month, round up to $6000. That small extra amount each month adds up over the years.
2. Use an Offset Account
Linking an offset account to your home loan allows you to reduce the interest charged on your loan without locking away your savings. Money in your offset account “offsets” your loan principal.
3. Budget for Extra Repayments
Treat extra repayments as a fixed expense in your monthly budget. Even allocating an extra $50 per week can significantly reduce your loan term. You can use our budget planner to see how making the extra repayments fits into your annual budget and find out if you have any surplus. You can use this surplus to pay down your loan even faster.
4. Make Repayments More Frequently
As mentioned earlier, making payments weekly or fortnightly can mean you make an extra month’s worth of repayments each year, accelerating your loan repayment.
Maximising Interest Savings with an Offset Account
Using an offset account on top of making extra repayments can significantly help you save more on interest over the life of the loan. Place all your earnings into your offset account, then use a credit card with an interest-free period for all your expenses. The money parked in your offset will decrease the interest you have to pay. Don’t forget to pay your credit card before the interest-free period ends to avoid being charged interest.
Do All Lenders Allow Extra Repayments Without Penalty?
Most variable-rate home loans in Australia allow you to make extra repayments without penalty. However, fixed-rate loans often come with restrictions. Some lenders limit the amount of extra repayments you can make during the fixed term. Some lenders may also charge fees when you make extra repayments, which can cost you more in the long run.
Before making extra repayments, check your loan agreement or speak to your lender or broker to understand any limits or fees involved.
When Is the Best Time to Make Extra Repayments?
The sooner, the better. Interest is front-loaded in most loans, meaning you pay more interest in the early years. Therefore, making extra repayments early in your loan has a much greater impact than doing so later on.
If you’re considering when to deploy a lump sum, it’s most effective in the first half of your loan. But don’t be discouraged. Any extra repayment at any time is better than none.
How to Make Extra Repayments on a Home Loan
Making extra repayments is typically straightforward. Here’s how you can do it:
1. Online Banking
Most Australian lenders allow you to make one-off or recurring payments above your required repayment using their online platform or mobile app.
2. Set Up Direct Debit Increases
You can ask your lender to increase your regular repayment amount automatically. This is a ‘set and forget’ way to build equity faster.
3. Use a Mortgage Offset or Redraw Facility
If you’re not sure whether you’ll need the money later, depositing it into an offset account or a redraw facility gives you flexibility. The funds reduce your loan interest but remain accessible.
Note: If you ever intend to convert your home to an investment property you should use an offset account and not a redraw facility.
Business Loans and Extra Repayments
You can make an extra business loan repayment if you want to save on interest and shorten your loan term. Making extra repayments on a business loan:
- Reduces interest expenses
- Improves your business’s cash flow over time
- Builds financial resilience
- Can improve your business’s credit profile for future financing
Just like with home loans, confirm whether your business lender allows additional repayments without penalty, especially on fixed-rate business loan products.
Final Thoughts
Making extra repayments, whether on your home loan or business loan, is one of the most effective strategies to reduce interest, pay off your loan faster, and save money.
Whether you choose weekly repayments, lump sums, or a combination of both, the important part is to get started. Every dollar counts, and the sooner you begin, the greater your long-term savings.
Get a Better Loan
Want to get a loan that allows you to make extra repayments without limits or fees? Contact our team at Dark Horse Financial to get access to the financing you need. We can help you secure the best rates and terms possible for your situation.
Disclaimer: Loans and the benefits of loan products are to approved applicants only. Information on this page is general in nature, it does not take into account your personal situation. This information is not intended to replace professional advice and should not be relied upon for any reason. You should always seek professional advice for finance, tax and accounting matters before making a decision or taking any action.
