Mortgage overpayments

How mortgage overpayments can free you from debt sooner

Rates and Fees verified correct on December 9th, 2016

The secret to paying your mortgage off quicker

There are so many simple ways to really quickly cut down how much you owe on your mortgage. Yet, the majority of tips all seem to focus on telling you to make extra payments and nothing else. What those kinds of tips don't take into account is that many homeowners simply don't have the extra cash to make large additional repayments. This is usually enough to make some people give up and believe they should just stick to making the minimum payments in order to stretch the budget further. Rather than think it's not worth the effort, let's look at some simple things you can do to pay your mortgage off faster without breaking the bank.

Make fortnightly payments

Almost every homeowner is aware that making your payments weekly or even fortnightly can pay off your loan faster. It's true. You really can save tens of thousands of dollars in interest charges and reduce your loan term by doing this. Here's how it works. Let's assume your monthly repayment is $1,000. Don't do any fancy calculations here. Just divide your monthly payment amount by 2 and pay this new amount on the same day every fortnight. You'll be paying $500 per fortnight.

Now, if you were to stick to your monthly payments of $1,000 you would end up paying $12,000 by the end of that year (12 months x $1,000 = $12,000). However, if you make fortnightly payments of half your monthly amount, you end up making exactly one additional payment per year (26 fortnights x $500 = $13,000). This additional payment every year really does help to reduce your balance, which in turn reduces the amount of interest that can be charged to your loan account. On average, you should cut your loan term by around six years by doing this. Use our calculator below to work out the effect extra repayments might have on your home loan.

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What about weekly payments?

interest calculationsThis is where most people ask if making weekly repayments will cut your loan down even faster. If you work out the calculations based on the principle above, you'll get the following results. Let's assume your monthly payments are still $1,000. Divide this figure by 4 to get $250 per week. Pay this amount of money on the same day every week. If you pay $1,000 per month, you'll pay $12,000 by the end of the year (12 months x $1,000 = $12,000). If you pay $250 per week, you'll pay $13,000 by the end of the year (52 weeks x $250 = $13,000. So, based on those numbers you've still only made one additional monthly repayment by the end of the year. But you're still ahead for a different reason – the way your interest is charged.

Take advantage of interest calculations

The interest on your mortgage is calculated on the outstanding balance every day. This means you can reduce the amount of interest you pay overall by increasing how often you make a payment on your mortgage. Let's take a look at an example. In this scenario, you owe $300,000 and you're paying 6.06% interest. Your monthly repayments are $1,810.24.

Payment NumberLoan AmountPaymentInterest PaidBalance
1$300,000$1810.24$1515.00$299,704.76

After just one month, you've paid $1810.24 on your repayment and you've paid $1515.00 in interest charges. Fortnightly Let's see what happens if you pay exactly the same amount of money over the same four weeks, but you pay it more frequently. In this example we'll make exactly two fortnightly payments of $905.12 – this is exactly half of the previous monthly payment.

Payment NumberLoan AmountPaymentInterest PaidBalance
1$300,000$905.12$699.23$299,794.11
2$299,794.11$905.12$698.75$299,587.74
(totals)($1810.24)($1397.98)

By paying fortnightly, you actually paid exactly the same amount of money over the month as you did in the first example ($1810.24). So there's no extra cash coming out of your pocket there. Yet, you only paid $1397.98 in interest instead of $1515.00. This is $117.02 less interest coming out of your hard earned cash. On top of this, your balance is down to $299,587.74. Of course this is $117.02 less than the previous example, as that interest saving is now paid off your mortgage balance instead.

Weekly

Let's look at how paying the exact same amount of money on a weekly basis affects your mortgage balance. Your monthly payment is still $1810.24. Divide this number by four to get $452.56 and pay this amount weekly.

Payment NumberLoan AmountPaymentInterest PaidBalance
1$300,000$452.56$349.62$299,897.05
2$299,897.05$452.56$349.50$299,793.99
3$299,793.99$452.56$349.38$299,690.80
4$299,690.80$452.56$349.26$299,587.49
(totals)($1810.24)($1397.76)

Once again, you've still paid exactly the same monthly payment amount of $1810.24 over those four weeks, so you haven't made any extra payments yet; however, the amount of interest you've paid is $1397.76 instead of $1515. This $117.24 you saved gets paid off your mortgage balance instead. This figure is only marginally higher than the amount you saved by paying fortnightly. However, this example only runs over one month. Over the term of a 30 year loan, those small savings really do add up to a lot of money.

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Rounding up: small change counts

The vast majority of banks will allow you to nominate the amount you want to pay with each repayment you make. This means you don't have to pay just the minimum amount. small changeOf course, if you don't want to stretch your budget too far you can simply round up the payment you make to the nearest $5 or $10. This makes it easier to remember and it counts as making an extra payment.

If you have a mortgage of $300,000 at 6.06% your monthly payment is $1810.24. Round this figure up to an even $1820 each month. It's only $9.76 per month extra so it won't break your budget. Yet, you'll shave 6 months off the end of your mortgage term and save $6,293.33 in interest charges. Small change has a big impact. Imagine how much more you could save and how much faster you'd repay your mortgage if you could round up that number even higher.

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Use offsets and redraws

Any opportunity you have to reduce the amount of interest you're charged helps you to pay off your mortgage faster. If your home loan has the capacity to link a 100% offset account to it, take advantage of this. Every dollar you leave in your offset savings account actively reduces the amount of interest you pay on your mortgage.For example, if your mortgage is $300,000 and you have $10,000 in your offset account you'll only pay interest on $290,000.

The vast majority of mortgages have their repayments calculated to include a portion that covers the interest component and a portion that comes straight off your balance. If you can reduce the amount of interest you pay, this automatically means each payment you make pays more off your balance.

Another popular modern home loan feature is redraw, where you can withdraw money from your home loan if you have made additional repayments. This gives you the freedom to make additional repayments, without having to worry about losing access to those funds in an emergency. Lenders are able to offer this service by charging a slightly higher interest rate on a mortgage containing such features, to cover higher loan maintenance costs and the possibility of lost income for the lender. However, borrowers are more than willing to pay a slightly higher interest rate, in return for being able to pay off their mortgage earlier and save themselves money.

While home loans without these features are cheaper, you will need to make sure that your mortgage repayment plan allows additional repayments, because if it is not an included feature, you will usually pay high fees each time you make an additional repayment or redraw. Lenders typically calculate their exit fees based on your loan type and term, where the exit fee decreases each year you hold your loan and levels out to a standard fee at around five years. However, if you want to find out how you can avoid any more unnecessary fees on your home loan, find a mortgage broker in your area who can help with your home loan search and application.

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Mix and match

The best part about mortgage reduction tips is that you have the freedom to mix and match them to suit your own budget and your own preferences. You can even put them all to good use and take advantage of the interest savings as you repay your home loan much faster. Do some simple calculations and see what effect making a few extra repayments can make to your current mortgage. Work out how much you'll save by making your payments more frequently.

Really sit down and work out your budget to see how much extra you're able to afford. Each of these things will help you to pay off your home loan faster in the long run. It's also important to compare your options and check the market for a loans that have a better rate. Refinancing your loan with another lender can save you thousands.

About how to save money on your home loan

The drawbacks of mortgage overpayments

Whether you can repay your mortgage early will also depend on whether your lender charges early repayment and overpayment penalties. These penalties are imposed as a mortgage loan is considered by the lender to be a stable and reliable source of income, which allows them to accurately project their returns into the future. Therefore, if you truly want to benefit from mortgage overpayments to get out of debt sooner, make sure you choose a home loan which allows unlimited additional repayments for free. If you are making additional repayments in the early years of your mortgage and attracting penalty fees, the savings you are making in interest will outweigh those costs.

However, as you near the end of your loan term there is less time for your additional repayments to save you interest and those penalty fees will quickly eat into any savings. Therefore, if you do have a home loan which charges penalties for additional repayments, save up your repayments and make them as one lump sum amount, to lessen the fees applied for the additional repayment transactions. If you have chosen a home loan which allows you to make unlimited additional repayments for free, you may be paying a higher interest rate for this fully featured loan, than you would for a basic home loan. While there are a number of loans to choose from which will allow additional repayments for free, make sure you consider how much you will be using the additional repayments feature, how much it will save you and whether these savings outweigh the higher interest rate. Just because you don't feel like you've got a lot of spare cash to throw at your home loan now, don't forget that if you get bonuses at work, you work on a commission or you get a generous tax bonus or gift of cash on your birthday, all of these can go towards repaying your mortgage debt sooner.

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Home loans offering offset accounts

Rates last updated December 9th, 2016
$
Loan purpose
Offset account
Loan type
Your filter criteria do not match any product
Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment
loans.com.au Offset Variable - New Purchases Only Up to 80% LVR (Owner Occupier, P&I)
Special offer ends 15 December. No application or annual fees, and access to a 100% offset account.
3.49% 3.51% $0 $0 p.a. 80% Go to site More info
State Custodians Standard Variable Spring Special - LVR 80% (Owner Occupier)
Special Owner Occupier Rate. Free Offset Account.
3.59% 3.92% $0 $299 p.a. 80% Go to site More info
Switzer Home Loan
No upfront or ongoing fees and a competitive variable rate for owner occupiers.
3.89% 3.89% $0 $0 p.a. 90% Go to site More info
IMB Accelerator Home Loan  - LVR <=80% $300k+ (Owner Occupier)
A two year discounted rate which reverts to an ongoing life of loan discount afterwards.
3.64% 4.39% $445 $0 p.a. 80% Go to site More info
3.94% 4.33% $0 $395 p.a. 90% Go to site More info
Greater Bank Ultimate Home Loan - Discounted Variable ($150K+ Owner Occupier)
A discounted rate with 100% offset account. NSW, QLD and ACT residents only.
3.89% 4.27% $0 $375 p.a. 85% Go to site More info
Newcastle Permanent Building Society Premium Plus Package Home Loan - New Customer Offer ($150,000+ Owner Occupier)
Apply for a new owner occupier loan or refinance from another lender and receive this discounted rate.
3.74% 4.12% $0 $395 p.a. 95% Go to site More info
State Custodians Standard Variable Spring Special - LVR 90% (Owner Occupier)
Special Owner Occupier Rate. Free Offset Account.
3.69% 4.02% $0 $299 p.a. 90% Go to site More info
Australian Unity Health, Wealth and Happiness Package - (Owner Occupier)
Get a 0.60% discount on your rate, a 100% offset account and no ongoing fees.
3.99% 4.02% $600 $0 p.a. 90% Go to site More info
AMP Basic Package Variable Rate Loan - Owner Occupier
Interest only option available. No monthly fee basic variable loan.
3.98% 4.02% $350 $0 p.a. 90% Go to site More info
Beyond Bank Low Rate Special Home Loan
A special low variable rate for Owner Occupier with 100% offset account and no application or ongoing fees.
3.73% 3.73% $0 $0 p.a. 70% Go to site More info
NAB Choice Package Variable Rate - $250k to $749,999 P&I (Owner Occupier)
A great variable package from NAB which includes offset and redraw features. No application fee.
4.40% 4.79% $0 $395 p.a. 95% Go to site More info
Greater Bank Ultimate Home Loan - Discounted 2 Year Fixed ($150K+ Owner Occupier)
Discount off an already competitive 2 year fixed rate for loans over $150k. NSW,QLD and ACT residents only.
3.74% 4.40% $0 $375 p.a. 85% Go to site More info
IMB Essential Home Loan - LVR < 80% (Owner Occupier)
Get a discount on your rate and flexible repayment options with this loan.
4.09% 4.09% $0 $0 p.a. 80% Go to site More info
NAB Choice Package Variable Rate - $750k+ P&I (Owner Occupier)
Enjoy discounted rates to a range of NAB products. 250,000 Velocity Frequent Flyer point offer, conditions apply.
4.35% 4.75% $0 $395 p.a. 95% Go to site More info
Switzer Investment Loan
An investment loan with no application or ongoing fees, and your very own lending service manager.
4.09% 4.09% $0 $0 p.a. 80% Go to site More info
CUA Fixed Rate Home Loan - 2 Year Fixed (Owner Occupier)
A fixed home loan with no ongoing fees and flexible repayments options.
3.69% 4.56% $600 $0 p.a. 95% Go to site More info
ANZ Fixed Rate Home Loan - 2 Year Fixed (Owner Occupier)
Lock in your rate for 2 years with an interest only option.
3.90% 5.06% $600 $10 monthly ($120 p.a.) 95% More info
Commonwealth Bank Wealth Package Fixed Home Loan - 2 Year Fixed (Owner Occupier)
Fee free extra repayments available during the fixed term. $1,250 cash back offer for refinancers. Conditions apply.
3.99% 5.00% $0 $395 p.a. 95% More info
St.George Fixed Rate Advantage Package -  2 Year Fixed Rate (Owner Occupier)
A discounted package rate for owner occupiers with the ability to package a Qantas rewards earning Amplify credit card. $1,500 cash back available for refinancers, conditions apply.
3.99% 5.07% $0 $395 p.a. 95% More info

Adrian Barclay

Adrian spends most of his working hours writing about home loans and everything property, as well as interviewing finance experts.

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HSBC Home Value Loan - Resident Owner Occupier only

Enjoy the low variable rate with $0 ongoing fee and borrow up to 90% LVR.

ME Bank Basic Home Loan - LVR <=80% Owner Occupier

A low variable rate loan with no application or ongoing fees.

NAB Choice Package Home Loan - 3 Year Fixed (Owner Occupier)

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4 Responses to How mortgage overpayments can free you from debt sooner

  1. Default Gravatar
    Carter | August 24, 2015

    Hey,
    I am doing a maths assignment and have been asked
    “the effect that the frequency of the repayment (weekly, fortnightly, monthly) can have on the total amount repaid”
    Could you please help me answer this :)

    Cheers

    • Staff
      Belinda | August 25, 2015

      Hi Carter,

      Thanks for your enquiry.

      On this page you can read our review about fortnightly vs monthly repayments and you can use our bi-monthly calculator to estimate the interest and time saved on a mortgage based on different repayment frequencies.

      Thanks,
      Belinda

  2. Default Gravatar
    Russell | August 23, 2015

    How does the calculator know how much I am currently paying monthly

    • Staff
      Marc | August 24, 2015

      Hi Russell,
      thanks for the question.

      This calculator uses an estimate on what loan repayments would be for the figures entered into it. As such it should be used as an estimate only.

      I hope this helps,
      Marc.

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