Home loans with unlimited additional repayments can save you a great deal of money over the long run. Even an extra repayment of just $100 per month cuts down your principal balance faster, reducing the loan amount and the amount of interest you're paying.
Compare home loans with unlimited extra repayments
How does a home loan with unlimited additional repayments work?
If a home loan lets you make unlimited additional repayments, this means the lender doesn't charge any fee for making extra repayments beyond the minimum monthly repayment amount. This means you can repay the loan faster and face no penalty for doing so.
This feature is typically only found on a variable rate home loan. Some fixed-rate home loans let you make limited extra repayments of around $10–$20,000 a year. Some fixed-rate loans don't allow it at all. And you might have to pay a fee for making extra repayments.
Making additional repayments
You can choose to make additional repayments in large lump sum amounts or just by adding a small amount to your repayment each week, fortnight or month. The more extra money you put towards your loan, the faster you will pay it off.
How much can you save with unlimited extra repayments?
Here's an example of how much you can save by making regular extra repayments on your home loan.
Let's say you've purchased an $800,000 home with a 20% deposit. This means you paid $160,000 for the deposit and borrowed the remaining $640,000. Your home loan is for 30 years, and your variable interest rate is 2.40%.
This means your monthly repayments (without extra repayments) would equal $2,495 a month.
But what if you repaid an extra $100 a month on top of that? That's only $1,200 a year extra. But if you started making these extra repayments from the start of your loan, you'd repay your loan in 28 years and 4 months instead of 30 years. And you'd pay $15,659 less in interest over that time.
If you increased that to $250 a month, you'd repay the loan in 26 years and 4 months while saving $35,811 in interest.
Pros and cons of home loans with unlimited additional repayments
Making extra repayments on your home loan is generally a good way to save money. The faster you get out of debt, the less interest you pay. However, there are times when you could enjoy the same benefit as extra repayments without actually repaying the loan (we'll explain below).
Positive
Pay off your loan faster. If you are consistent in making additional repayments, you will be able to own your home outright sooner and pay off the loan.
Save on interest. By making additional repayments, you are changing the base amount of the loan (the loan principal), thereby decreasing the amount of money you will have paid in interest fees over the length of your loan.
Redraw facility. Most loans that let you make extra repayments also have redraw facilities. If you have made extra home loan repayments, you can use the redraw facility to take some of that money out and spend it if you need it. This turns your home loan into a kind of flexible bank account.
Cons
Fees. Some banks will charge a fee for this service or penalise you with a high exit fee at the end of your loan.
Limited extra repayments on fixed loans. Most fixed-rate loans will only allow a set amount of additional repayments to be made each year. By going over this amount, you would be subjecting yourself to high fees and penalties. This makes this feature more adaptable to the variable rate home loan.
Why an offset account works better than extra repayments
Some home loans come with 100% offset accounts. This is a useful feature that allows you to put your savings in the home loan. Every dollar saved in the account will offset the loan principal. In effect, it's the same as an extra repayment. If you put $100 in your offset every month, your lender treats that as an extra repayment. You pay less interest, you repay the loan faster.
With an offset account, you can pull this money out and spend it if you need it. It's just like a redraw facility but more flexible. Extra repayments belong to your lender. You can redraw them, but the lender determines how. In an offset account, the money is all yours. Read more on the difference between offsets and redraw.
Not every home loan has an offset account. If yours does have one, don't make extra repayments. Stick them in the offset and get more control out of your money.
Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification.
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1 want too know if paying my monthly mortgage payment divided by days in the month will zero the intere7im charged
Hi Eleni,
The only way to pay zero interest is to have an offset account with the same amount of savings as your outstanding balance.
Ed a loan balance of $200,000 with an offset account balance of $200,000 would result in $0 interest being paid.
However, making payments fortnightly instead of monthly can save you thousands – here’s an explanation.
https://www.finder.com.au/dollar-saver-tip-25
Hope this helps!