Extra Home Loan Repayments: How Effective Are They?

16th May, 2020 | Loan Features

In this article:
When you're behind on mortgage repayments and looking for a way to catch up, here's how the additional home loan repayment feature can help.
Every extra dollar you put on your home loan above your minimum monthly repayments can save you significantly over the long run. Many, but not all, variable loans offer the option to make unlimited payments without penalty. Fixed rate loans usually restrict extra repayments and place limits on the total amount you’re allowed to repay.

Don’t think you need to have lots of surplus cash before you can use this feature. You’ll benefit regardless of whether you pay a little bit extra or a larger lump sum. That’s because every payment you make cuts down your principal, reducing your loan amount, which lessens the interest and helps you reach your homeownership goals sooner.

An example of what you could save

Here’s an example using the Yellow Brick Road extra repayments calculator.

Let’s say your 30-year home loan amount is $500,000 at 3.2% interest. Your minimum monthly repayment is $2,162, and you increase it by $100 each month. By doing so, you will save $14,731.47 in interest, plus you pay off your loan 1 year, 8 months earlier.

Even an additional $10 extra each week will shave around eight months off this loan and accrue savings of $6,170 over its life. Pay weekly, fortnightly or monthly, whatever frequency you can manage.

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The more often, the better

Paying your home loan weekly will bring the best savings because interest is usually calculated daily, using the balance at the end of the day. With frequent payments, not only do you pay back the principal faster, but you also reduce the interest accrued.

A useful hack for paying off your loan sooner is to switch to weekly or fortnightly repayments instead of monthly. Let your Yellow Brick Road mortgage broker know if you decide to make the switch as we’ll check your loan offers this option and that it doesn’t charge extra fees for making more frequent repayments.

Also, check that your repayment is exactly half if you’ve changed from monthly to weekly payments. Mortgage calculators and lenders often divide your total annual amount by 26 fortnights – which won’t generate much of a saving.

Use redraw to keep the funds accessible

If you want to make additional repayments, but you’re concerned about tying up your money that may be needed down the track elsewhere, consider the option of redraw.

A redraw facility enables you to make extra repayments and at the same time have the peace of mind you can access this money in the event of an emergency. Redraw has been a useful tool to help borrowers over the last few months who have been struggling financially with the effects of COVID-19.

What to watch out for

Even though your variable loan might allow for extra repayments, you might find that it charges a fee for this service or a fee for paying off your mortgage early.

If you’re on a fixed rate loan and want to make additional repayments, stick within the allowable limits. Going beyond these will incur expensive break costs.

If you’re on a split loan, don’t assume that you can make extra repayments on the variable portion while the fixed portion is active. First, check with your mortgage broker or lender.

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