What everybody ought to know about making extra home loan repayments.
Most of us wonder paying off a home loan sooner is worth it. Apart from being debt-free sooner and the benefits that comes with, paying just a little extra each month can lead to considerable savings in the form of interest.
While making one or two additional payments doesn’t amount to much, if you keep doing this on an ongoing basis the benefits become more noticeable. If not by much, the least you can do is round off your mortgage payments. For example, if you have to repay $640 each month for a $200,000 loan, consider rounding it off to $650 and if nothing else, this will at least remove four to five payments towards the end of your loan.
When you make extra payments make sure your lender applies it to the principal and does not save it for the next payment. In addition, make sure your lender allows you to make additional repayments, because some home loans attract prepayment penalties or have limits on the amount of additional payments you can make.
Using an extra home loan payments calculator gives you a good indication of how much you stand to save by making extra payments. One thing you’ll notice is that the sooner you start making extra payments, the greater the impact will be.
Extra loan repayment calculator
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How to use the extra home loan payments calculator
Using the extra repayments calculator requires you to input details about your existing home loan. Here’s the information you’ll need:
- Loan amount. This is not the original loan amount, but how much of the principal loan amount you still have to pay. If your loan was for $600,000 and you’ve already paid $200,000 towards the principal, enter $400,000.
- Interest rate. This refers to the interest rate that your home loan attracts and it can be fixed or variable.
- Loan term. This refers to length of time you have left on your home loan.
- Repayment frequency. Mention if your payments are weekly, fortnightly, or monthly.
- Extra amount. This is how much you wish to pay in addition to your regular repayments. In this case, the more you can pay the better.
- Starts after date. This indicates when you want to start making extra payments. For example, if you've already had your home loan for five years and want to start making extra payments now, enter five.
After entering the required information the calculator automatically tells you the effect your extra payments will have on the life of your loan. Moving the mouse over the graph lines informs you of the impact on a year-to-year basis.
Elizabeth has paid $150,000 towards the principal of her $650,000 home loan with a 5.50% p.a. rate and she still has 20 years of the original 30 years to go before she can truly call her home her own. With a steady source of income, making additional payments isn’t much of a problem and luckily, the home loan she has allows her to make extra repayments without imposing any penalties.
Using the calculator, she works out that by increasing her monthly payment from $2,271.16 to $ 2,371.16- an increase of $100 - she can reduce the loan term by 17 months and save around $18,000 in interest.
She doesn’t stop there, though. She figures that rounding off her monthly payment is just as affordable and that’s exactly what she does. She now makes a monthly payment of $2,400, which is $128.84 more than her regular payment. She will now save 22 months off her loan term and more than $22,000 in interest.
Frequently asked questions about making extra payments on your mortgage
Would it help if I also change my monthly payments to fortnightly or weekly payments?
Yes. You will be making the same value of repayments each month, but as there’s an extra fortnight in the year you’ll be making an additional repayment every year. While it doesn’t seem like much, this does add up over the loan term.
If I make extra payments and need the money later on, is there any way I can access it?
Many home loans come with redraw facilities that allow you to do just this. They allow you to make extra repayments, and then access this extra money as and when required.
What if my lender imposes extra repayment penalties?
If this is the case, you might want to calculate to see which one is more profitable. If the penalties exceed the savings, there’s no point making extra payments.
If you think you can make extra repayments towards your home loan and if your lender allows it, doing so can be in your best interest. Not only do you stand to save money, you also pay off your loan sooner. Before making extra repayments, don’t forget to find out if you can do so without facing any penalties.