Homeowners with a mortgage could be saving years off their loan by making extra repayments as small as $50 per week.
According to new research, only one in four borrowers are ahead in their loan repayments and it’s incredible the difference a small amount can make.
Amazingly just an extra $50 towards a typical $400,000 30 year mortgage on a 4.50% interest rate will mean your loan is paid off 5 years and 2 months earlier!
Not only this you would also save $51,311 in interest repayments 😳!
In this guide, we’ll be showing you how easy it is to make extra home loan repayments and calculate the difference a small amount can make to your monthly payments.
- Does increasing my home loan repayment make much difference?
- Why you should make extra repayments on your home loan
- When am I not able to make additional repayments?
- What counts as extra repayments on a home loan?
- Is it possible to use my offset account to make higher payments?
- Increasing your repayment frequency to pay off your loan quicker
- How many years does it normally take to repay a loan?
- How many years will it take to repay a home loan with extra repayments?
- When is the best time for making additional repayments?
- Does my interest rate affect my extra repayments?
- How much should I make the extra repayments?
- Need some help crunching the numbers?
Does increasing my home loan repayment make much difference?
Paying an increased amount on your home loan will help you repay the loan much faster.
For example, Charlotte wants to make an extra $341 per fortnight on top of her existing $964 fortnightly home loan repayment, paying a total of $1,305 each fortnight. Over the next 12 months, she pays an extra $8,866 which is basically the same as 6 months additional payments each year.
Incredibly this will take 11 years off Charlotte’s 23 year home loan term, and $125,991 in interest costs!
Why you should make extra repayments on your home loan
For every dollar in extra repayments you make, it will be one dollar less in interest you will need to pay. So the first reason is getting your interest costs down, but that isn’t the only reason you should be making extra repayments on your home loan.
In paying down your loan, you are also increasing the equity in your property meaning you will own more house than the debt.
Home equity is calculated as the difference between the value of your home, minus the loan. So if you owed $310,000 to the bank, and your house was worth $501,000 your home equity would be $191,000 ($501,000 minus $310,000).
Making extra repayments will also help you build a buffer of savings that will accumulate in your loan, and be there should you ever need them.
Read More: 7 Ways of Creating Home Equity [Faster]
When am I not able to make additional repayments?
If you have a variable home loan rate, you can make as many additional repayments as you would like.
On the other hand, if you have a fixed rate home loan there might be limitations in how much you can make in additional repayments.
Some banks will allow you to make up to $10,000 per year in additional repayments, and others will not allow any additional repayments during the fixed rate period. If you would like us to check what your bank’s requirements are, get in touch and we can confirm.
Fixed rate home loans are great for people who want stability and to know what your repayments will be over a set period, but they aren’t great if you are looking at making extra loan repayments.
Read More: Which is the best type of home loan for me?
What counts as extra repayments on a home loan?
When you take out a home loan, you will be given a contracted term which generally ranges from 25 to 30 years.
In other words, the bank will calculate what your principal and interest repayments should be each month for the next 25 to 30 years using something called an amortisation schedule.
Using the loan amount, interest rate and loan term the bank will determine your monthly payment from today, until it is fully repaid in 30 years time.
In this example, if I took a mortgage of $450,000 today and making my minimum repayments of $2,069 ($1,384 interest and $685 principal) it would take me 30 years to completely repay the loan. Over this period I would pay $294,743 in interest to the bank!
If I started making an extra $200 per month in repayments straight away, my loan repayments would be increased to $2,268 per month ($1,384 in interest and $885 principal) and by making this small difference I would save 4 years, 5 months from my loan term AND $49,102 in interest costs!
Even if you’ve had your loan for a few years, it isn’t too late to start making extra repayments. For example, if I had my loan for 5 years and only then started making an extra $200 per month in repayments what would the difference be?
By starting to make extra repayment contributions after 5 years of $200 per month, I would still save 3 years, 4 months from my loan term AND reduce my interest costs by $32,459!
Is it possible to use my offset account to make higher payments?
A home loan offset account helps you reduce interest costs because every dollar in your offset account is reducing your home loan balance by the same amount.
…So additional repayments to your offset account will have the same effect as an extra repayment!
If you can be careful with your money it can be better to make the extra repayments into your offset account because it can be easier to access the funds compared to redraw.
But at the end of the day, an offset and redraw account do the exact same thing.
As you can see from the example above, if you had $20,000 in the offset account (or in redraw) it would reduce your home loan balance by $20,000 and mean you are paying interest on a lower amount.
In this case, you would only pay interest on $130,000 (instead of $150,000)!
Read More: What does a 100% offset account do?
Increasing your repayment frequency to pay off your loan quicker
Out of everything, this is possibly the simplest AND most effective tip we can give you…
(The bi-monthly trick)
Most banks, by default, give you monthly repayments…So in a year, they will assume you make 12 repayments.
Let’s say your monthly repayment is $2,000.
In a 12 month period you will make $2,000 x 12 months = $24,000 in repayments. Simple right?
If you switch to bi-monthly (also known as fortnightly) repayments, you will make an extra 2 repayments without even realising.
So you make $1,000 payment ($2,000 divided by 2) every fortnight which there are 26 per year = $26,000 per year in repayments!
You will make an extra $2,000 in repayments per year without even realising AND save 4 years and 4 months from your loan!!!
How many years does it normally take to repay a loan?
The banks will give you a home loan with a standard loan term of between 25 to 30 years.
There are some exceptions depending on your age, where the bank may require you to reduce your loan term.
But in general, the banks will give you a default loan term of 30 years and assume you will not make additional repayments…
…Which is why you should look at the extra repayment calculator to see how many years you can save from your loan term!
Read More: 7 Ways of Creating Home Equity [Faster]
How many years will it take to repay a home loan with extra repayments?
The total time it will take you to repay your home loan is going to depend on a range of things, including your interest rate, loan balance, repayment frequency (monthly, fortnightly, weekly), the extra repayment amount and when you start making additional repayments.
Broadly speaking, the more you make in additional repayments, the sooner you make it will help you pay off the home loan faster.
When is the best time to start making additional repayments?
As you have seen from the examples above, the sooner you start making additional repayments the faster you will pay off your home loan.
Let’s use an example to illustrate this with a loan term of 25 years, making additional repayments after 5 years you could save $20,037 and over 2 years from your total loan term. Compare this to if you started making extra repayments after 10 years, you might only save $10,697 in interest and 1 year, 6 months.
Extra repayments start
Interest saved over the loan term
Total time saved
Immediately (0 years)
3 years, 1 month
2 years, 11 months
2 years, 9 months
2 years, 7 months
2 years, 5 months
2 years, 3 months
1 year, 6 months
0 years, 11 months
Figures calculated on $450,000 loan amount, 25-year initial loan term, 3.69% interest rate and extra contribution of $200 per monthly payment.
Does my interest rate affect my extra repayments?
Switching to a lower interest rate can make a big difference in both what you pay on your monthly repayment, and also how fast you can repay your home loan.
As you saw in the above amortisation schedule, more than half of your monthly repayment interest so the interest rate makes a big difference.
Let’s say you owed $450,000 had 30 years on your loan term, you were paying 4.50% interest and had monthly repayments of $2,280.
If you were to switch to a lower interest rate of 3.69% (using ASIC’s Moneysmart calculator) and maintain the previous monthly repayment of $2,280 (even though your repayment would drop by default as the rate is lower) you would actually pay off the loan 4 years faster (55 months) and save $127,470 in interest costs!!
The difference is MASSIVE.
Read More: 7 Reasons to Refinance your home loan
How much should I make the extra repayments?
As we’ve covered, the more you can afford to repay the less interest you will pay and the faster you can pay your loan off.
But the amount of your extra repayments is really up to you, and what you can afford.
We’ve done some numbers below based on a $450,000 home loan, over 25 years to give you a bit of an idea on the difference other amounts make on your repayments.
Extra Repayments per month
|Total interest savings over the life of the loan||Total time saved over the life of the loan|
1 year 7 months
3 years 1 month
4 years 4 months
5 years 5 months
6 years 5 months
10 years 2 months