Paying a little extra on your home loan is one of the simplest ways to cut the cost of borrowing. It doesn’t need a refinance, a new product or a big change to your budget. But the effect is easy to underestimate, because it builds quietly over years.
Here’s how extra repayments work, what $100 a week could do to a typical loan, and what to check before you start.
How extra repayments work
Interest on your home loan is charged on the balance you owe. Every extra dollar you put against the loan lowers that balance, so you’re charged less interest from then on, and more of each regular repayment goes towards the loan instead of interest.
Timing matters. In the early years of a home loan, most of each repayment goes towards interest, so extra payments made early reduce the interest you pay over the life of the loan the most (ASIC MoneySmart).
What $100 a week could do
Here’s a worked example. It assumes a 30-year principal and interest loan at 6.34%, which is in line with the lowest big four variable rates at the moment, with the rate unchanged. The extra $100 a week is paid from day one, which works out to about $433 a month.
| Loan size | Time saved | Interest saved |
|---|---|---|
| $400,000 | 9 years 7 months | about $182,000 |
| $600,000 | 7 years 3 months | about $210,000 |
| $800,000 | 5 years 11 months | about $228,000 |
On a $600,000 loan, the regular repayment is about $3,730 a month. Adding roughly $433 a month, an increase of about 12%, brings the payoff date forward by more than seven years.
Those figures are illustrative. Real loans vary, and rates can change over the life of a loan.
How much extra makes a difference?
You don’t need to start at $100 a week. Here’s the same $600,000 loan with different extra amounts:
| Extra repayment | Time saved | Interest saved |
|---|---|---|
| $50 a week | 4 years 3 months | about $125,000 |
| $100 a week | 7 years 3 months | about $210,000 |
| $200 a week | 11 years 5 months | about $322,000 |
Doubling the extra payment more than doubles the saving, because each extra dollar also stops the interest that would have been charged on it for the rest of the loan.
Does the interest rate change the picture?
Yes. The higher your rate, the more each extra dollar saves. The same $100 a week on a $600,000 loan:
| Interest rate | Time saved | Interest saved |
|---|---|---|
| 5.50% | 7 years | about $169,000 |
| 6.34% | 7 years 3 months | about $210,000 |
| 7.50% | 7 years 9 months | about $276,000 |
With the RBA cash rate now at 4.60% after four rises this year, interest is costing borrowers more than it was, which makes each dollar of interest avoided worth more.
Other ways to pay your loan down faster
Extra repayments are one option. Others include:
- Paying fortnightly. If you pay half your monthly amount every two weeks, you make the equivalent of an extra month’s repayment each year, because there are 26 fortnights in a year (ASIC MoneySmart). On the $600,000 example, that could save roughly 5 years 8 months and about $165,000 in interest, as an estimate.
- Using an offset account. An offset account is a transaction or savings account linked to your loan, and its balance reduces the balance interest is charged on. A $20,000 balance on a $500,000 loan means you’re charged interest on $480,000 (ASIC MoneySmart). Your money stays accessible.
- Using redraw. Extra payments go onto the loan, and you may be able to withdraw them later. Some lenders limit how much you can redraw or charge a fee.
- Putting lump sums on the loan. Bonuses, tax refunds and other windfalls can go straight onto the balance.
What to check before you start
Whether your loan allows it. Variable rate loans usually allow extra repayments without penalty, while fixed rate loans often cap how much extra you can pay each year, and going over the cap can trigger fees. Caps differ between lenders, so check your loan contract or ask your lender.
Any fees. ASIC MoneySmart advises checking with your lender whether extra repayments are allowed and whether any fees apply.
How you can access the money. Extra repayments reduce the loan, but getting the money back depends on whether you have redraw or an offset account, and on the terms. If you might need the cash, an offset account can offer more flexibility.
The cost of the features. Offset accounts can come with a higher rate or package fees. MoneySmart suggests comparing that cost against the benefit, particularly if your offset balance would stay low.
Is it the right move for you?
Paying extra suits some people better than others. It’s worth thinking about:
- Your buffer. Do you have savings for emergencies? Money paid into the loan isn’t always easy to get back.
- Other debts. Higher-interest debts, such as credit cards, usually cost more than a home loan.
- Flexibility. Your income, plans and family situation may change over 30 years.
- Your rate. If you’re paying more than you need to, refinancing may save as much as extra repayments, with no extra cash needed.
This is general information, not advice. Your own situation will shape the right answer.
Make sure your loan works for you
If you’d like to see what extra repayments could do on your own loan, try our home loan calculator. If your loan doesn’t allow extra repayments, charges for them or has a rate that’s higher than it needs to be, it may be worth looking at your options. Our refinancing page explains how that works, and our guide to what a comparison rate is shows how to compare the fees on different loans.
The hfinance team compares 50+ lenders and can show you what’s possible for your loan.
This article is general information only and does not take into account your personal financial situation or objectives. Figures are illustrative estimates based on the assumptions stated, including a 30-year principal and interest loan with an unchanged rate, and will differ from real loans. Speak with an hfinance broker before making any lending decisions.