Extra repayments are something we can control, we can’t control what the RBA decides to do and the ramifications on our household budget. However it seems the uphill climb on rates has paused and we are in a holding pattern, this is obviously still affecting 1/3 of of the population who are paying off a mortgage however future planning is key. Your rates might be high but you can make up for it by cutting down your loan term on the back end.
One of the main things that we preach to clients is that you want to be structuring your home loan so that you should not be paying off your mortgage for 30 years. The worst thing you can be doing is paying your mortgage monthly and paying the minimum required amount. While many borrowers stick to the minimum repayment set by their lender each month, making extra repayments can be an effective way to reduce the overall cost of your loan.
How do extra repayments work?
When you take out a mortgage, it consists of two key components: the principal (the amount the bank lends you) and the interest (the cost of borrowing that money).
During the initial years of your loan, most of your scheduled repayments will go towards covering the interest. However, any extra payments you make are applied directly to the principal.
By making extra repayments—especially in the early stages of your mortgage—you can reduce the principal and, in turn, decrease the amount of interest charged on the remaining loan balance. Over time, this can lead to significant savings and shorten the loan term by several years.
You could also save by making a lump sum payment. Whether it’s from an inheritance, a cash gift, or a substantial tax return, adding these extra funds towards your mortgage can help control the total amount owed. For those concerned about their growing loan costs, extra repayments can be a helpful strategy for managing overall debt.
How much can I save by making extra repayments?
Let’s assume you have a $700,000 loan to be repaid over 25 years. The interest rate is 6.19% p.a., and your monthly repayments are set at $4,592. At this rate, you’ll end up paying $677,528 in interest over the life of the loan.
But, if you increase your monthly repayments by just $150, you could save approximately $76,310 in interest by the time your mortgage is paid off. Additionally, you’d become mortgage-free two years and two months earlier than scheduled.
The table below illustrates the potential savings on a similar $700,000 loan with varying extra repayment amounts. You can use our extra repayments calculator for a more tailored estimate.
Projected savings on a $700,000 loan over 25 years
| Extra Monthly Repayment | Savings Over Life of Loan | Time Saved |
| $50 | $27,742 | 10 months |
| $100 | $53,072 | 1 year 8 months |
| $150 | $76,310 | 2 years 2 months |
| $200 | $97,808 | 3 years 1 month |
| $250 | $117,763 | 3 years 9 months |
| $300 | $136,344 | 4 years 4 months |
While starting extra repayments early is ideal, not everyone can afford to do so. Fortunately, you can still achieve significant savings even if you begin making extra payments later in the loan.
For instance, using the same scenario but starting extra monthly repayments of $150 ten years into your mortgage, you could still save $41,526 in interest and reduce your loan term by one year and one month.
Are there any limits?
Most variable rate loans allow unlimited extra repayments at no additional cost. However, fixed-rate loans may restrict the amount you can repay each year or charge fees for additional payments. Be sure to check your lender’s policy on extra repayments before signing up for a loan.
Is it worth making extra repayments on my home loan?
Paying more than the minimum required by your lender is a smart way to save money and pay off your loan sooner. The faster you can eliminate your mortgage, the more financial freedom you’ll have.
However, while extra repayments are beneficial, it’s important to assess your financial situation first. If you have other high-interest debts, it may be more advantageous to pay those off before putting extra money toward your mortgage. Be sure to strike a balance that works for your overall financial health. Contact us on startnow@sorenfinancial.com and we can run an audit on your existing home loan and show you how to shave years off your home loan and add to your family’s wealth and your retirement.
