If you’ve found yourself with some extra money and you’re considering making some extra payments on your home loan, you might be wondering if those extra home loan repayments are worth it. Depending on your lender and the conditions of your mortgage, there could be both positives and negatives to going beyond your required monthly repayments — let’s take a look.
Making additional repayments to your mortgage
Depending on your home loan, your lender may offer features like unlimited extra repayments. Making additional payments, if available on your home loan, could be one way to reduce your loan term (paying off your loan faster) and pay less interest over the life of your loan.
In Australia, your home loan will be your principal amount paid back along with interest (at the interest rate attached to that specific financial product) in regular instalments. This usually means monthly repayments, but some lenders will be flexible and allow weekly or fortnightly repayments. You will be able to choose between a fixed rate and a variable interest rate, along with choosing the loan term and loan amount. Keep an eye on the comparison rate, which takes the interest rate you will pay and factors in ongoing fees on the home loan.
Generally speaking, more straightforward loans with fewer features and stricter criteria will also have lower rates. Check the target market determinations and product disclosure statements for any home loan before seeking to make any extra monthly repayments.
While making regular repayments to your loan account will pay off your home loan in the set loan term, making additional repayments will speed up that process. For that reason, your lender may limit how many extra repayments you can make — if you can make them at all. As a disclaimer, there may also be fees attached for making any additional lump sum payments to your home loan.
Likewise, a bare-bones home loan may not allow you access to a redraw facility. This is where you can tap into any extra home loan repayments that you have made and take that money back out, should your financial situation call for it. This is something to check for if you’re considering making any extra repayments.
If you’re considering making extra repayments on your own home, you’ll likely want to know what difference your repayments will actually make.
How much can making extra mortgage repayments save me?
To find out how much you can save by making additional payments to your mortgage, you may want to use an extra repayments calculator.
With any extra repayments calculator, you’ll need to plug in these details:
- Loan balance — the amount owing in your loan account.
- Interest rate — this could be a single interest rate if you’re on a variable rate home loan or may require more specific information if you are on a fixed rate home loan (like the duration of the fixed rate). This will be used to calculate the total interest on your loan if you are making the regular repayments and the difference between that and the amount of interest you will pay with additional repayments.
- Loan term — the amount of time remaining on your loan (per your loan agreement).
- Loan fees — any regular ongoing fees, potentially or fees attached to making extra repayments.
- Repayment amounts — Generally, you can toggle optional repayment amounts to see what difference different repayments will make.
Calculators will be helpful for a broad strokes view of how much you could save by making extra home loan repayments.
They can’t specifically take into account factors like you potentially opting to refinance your home loan down the line, putting money into an included offset account, or taking advantage of your home equity (whether it’s to buy an investment property, fund a retirement, or gain access to more funds). These changes to your financial situation, like refinancing, can switch up predictions entirely.
You should also remember that while extra repayments may be worth it despite fees, a certain level of fees may eventually outweigh potential savings.
