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Should I make extra repayments on my home loan?

By Niko Iliakis and Cameron Thomson
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Despite some relief from the RBA pausing its interest rate rise program, rates are still biting down on everyday borrowers. One way mortgage holders are managing their loan is through extra repayments. 

Chances are you don’t want to be paying off your loan for any longer than necessary. While many people will only pay the minimum amount set by their lender each month, making extra repayments can be a great way of cutting down the overall cost of your loan.Despite some relief from the RBA pausing its interest rate rise program, rates are still biting down on everyday borrowers. One way mortgage holders are managing their loan is through extra repayments. 

How do extra repayments work?

When you take out a loan it will consist of two components: the principal (which is the amount the bank has agreed to lend you) and the interest (which is the cost of borrowing that money). 

During the first few years of the loan, the bulk of your scheduled repayments will go towards paying down the interest. But anything you pay above that amount will be directed towards the principal instead.

When you make extra repayments—particularly in the early stages of your mortgage—you can whittle away at the principal and help to reduce the amount of interest it accrues. Over time, this can save you tens of thousands of dollars, not to mention shave years off the life of your loan. 

Similarly, you can also save money by making a lump sum payment. Whether you’ve inherited a sum of money, received a cash gift, or gotten back a sizable tax return. For people who are worried about the size of their loan costs ballooning, extra repayments can be a super helpful way of managing the overall amount owed.When you make extra repayments—particularly in the early stages of your mortgage—you can whittle away at the principal and help to reduce the amount of interest it accrues. Over time, this can save you tens of thousands of dollars, not to mention shave years off the life of your loan. 

How much can I save by making extra repayments?

Let’s say you have a $500,000 loan you intend to pay off over 25 years. The interest rate is 6.19% p.a. and your repayments are set to $3,280 per month. At this rate, you will pay a total of $483,948 in interest over the life of the loan
But if you were to increase your monthly repayments by $150, you could save around $54,507 in interest charges by the time your mortgage is paid off. You will also be mortgage free a full two years and two months ahead of schedule.
The table below shows how much you stand to save on a similar loan by making extra repayments of various sizes. Use our extra repayments calculator to get a personalised estimate.Let’s say you have a $500,000 loan you intend to pay off over 25 years. The interest rate is 6.19% p.a. and your repayments are set to $3,280 per month. At this rate, you will pay a total of $483,948 in interest over the life of the loan

Projected savings on a $500,000 loan over 25 years

Extra monthly repaymentSavings over life of loanTime saved
$50$19,81610 months
$100$37,9091 year 8 months
$150$54,5072 years 5 months
$200$69,7963 years 1 months
$250$83,9423 years 9 months
$300$97,0704 years 4 months

While it’s best to start making extra repayments early on in the mortgage, that won’t always be feasible for everyone. The good news is you can still see significant savings if you start further down the track.

For example, if we used the same figures from the last example but assumed you only started making those extra monthly repayments of $150 ten years into your mortgage, you would still manage to save $29,661 in interest and trim one year and one month off the life of your loan.

Are there any limits?

Most variable rate loans let you make unlimited free extra repayments. Fixed rate loans on the other hand, might cap the amount you can repay each year, or charge you a fee for the privilege. Make sure to ask your lender what their rules are around extra repayments before you sign up for a loan.

Is it worth it to pay extra on my home loan?

Making regular repayments above what your lender requires is a great way to save money and pay off your mortgage ahead of time. The sooner you can rid yourself of mortgage debt, the more disposable income you’ll have to spend as you wish. 

However, while extra repayments are a great way of reducing the length of your loan and the interest required, that doesn’t mean you should jump in immediately. It’s best to only pay extra on your loan if your finances allow it. If you have other debts, particularly ones that attract higher interest rates, it might not be a good idea to neglect them in favour of getting ahead on your mortgage.

Frequently asked questions

Can I withdraw my extra repayments?

That depends on whether your loan comes with a redraw facility. If so, you’ll be able to retrieve any additional repayments you’ve made to be used for other purposes. Just keep in mind that some fees might apply.

Will my repayments decrease in size if I pay extra?

No. The minimum amount you’re required to pay each month is set by your lender, and while you can always contribute more, you’ll need to get their approval if you wish to pay less.

Can I make extra repayments on my fixed rate loan?

Many fixed rate loans let you make extra repayments, but there might be conditions attached. For example, some loans apply annual limits, meaning you can only make extra repayments up to a certain amount each year.

Should I use an offset account instead?

When it comes to home loan features, access to an offset account and the ability to make extra repayments are among the most useful. That’s because they reduce the balance on which interest is charged, saving you money in the long run.

Whether you pick one or the other will depend on your personal circumstances. An offset account might suit someone who prefers to automate the process, since you can opt to have your salary directly deposited into the account. If you’re after flexibility, the ability to access funds in an offset account at will might also be appreciated.

What are other ways to save on interest?

Besides paying down your loan ahead of schedule, you can also save on interest by:

• Using an offset account

• Avoiding interest only repayments

• Switching your repayment cycle (e.g. from monthly to fortnightly)

• Making a lump sum payment

• Refinancing to a cheaper rate

For more information, browse our guide to home loan features. And if you’re looking for a home loan, visit our home loan comparison page, where you’ll be able to compare options by rate and type.

Home loan comparisons on Mozo - last updated 27 April 2024

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Niko Iliakis
Niko Iliakis
Money writer

Niko has three years experience as a finance journalist. He specialises in home loans, business loans and interest rate movements at Mozo.

Cameron Thomson
Cameron Thomson
RG146
Money writer

Cameron, with a background in radio and degrees in creative writing and history, is RG146 certified in Generic Knowledge. He tracks savings rates and trading platforms, aiding Aussie consumers in smart investments.