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.
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.
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.
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.
You can use our calculator to work out how much extra repayments could save you on your home loan.
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).
How extra repayments can see you pay your loan off sooner
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.
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What is an offset account? It can save you thousands in interest and help you own your home sooner.
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/app/dollar-saver-tip-25
Hope this helps!