Extra repayment calculator

How extra repayments on a home loan actually work

A scheduled repayment covers the interest charged since the last one, and the remainder comes off the balance. An extra repayment skips the first half of that. Every dollar of it reduces the balance, and the next period's interest is charged on the smaller number.

The power of it is in that split. On a $600,000 loan at 6% over 30 years the first monthly repayment is about $3,597, of which $3,000 is interest and $597 is principal. Adding $200 lifts the monthly cost by less than 6% and lifts the principal you repay by a third.

That table is the same $600,000 loan at 6% over 30 years, which costs $695,029 in interest if you only ever pay the scheduled amount. Nothing about the loan changed in any of those rows except the amount going out each month.

Why a dollar paid today beats the same dollar in twenty years

An extra repayment removes more than itself. It also removes every interest charge that dollar would have attracted for the rest of the term, which is why the same money is worth wildly different amounts depending on when you pay it.

Take $12,000 of extra repayments on that $600,000 loan, paid as $200 a month for five years. Do it in the first five years and it saves $47,900 in interest. Do it across years 21 to 25 instead and the identical $12,000 saves $6,624.

Same loan, same money, more than seven times the result. This is the whole argument for a small regular extra now over a larger one you promise yourself later, and it is the reason waiting until you can afford $500 a month usually costs more than starting on $50.

Redraw or offset: where the extra money should sit

There are two common places to put money you want working against the loan, and they reduce your interest by almost identical amounts. What separates them is how easily you get the money back and what the arrangement costs to hold.

The calculator above models the first column. It reduces the balance and recalculates the interest on what is left, which is what an offset of the same size does to your interest bill as well, while the money stays in your name.

Worth asking before you start

• Does the loan allow extra repayments, and is there a limit on them
• Is redraw available, and is there a minimum amount or a fee per redraw
• Can the lender reduce or freeze redraw access, and under what conditions
• Does the loan come with an offset account, and what the package costs to hold
• Will the extra be applied to the balance, or held as payments in advance

Paying off your mortgage faster without wrecking the budget

The arithmetic above only works if the extra keeps happening. A $500 month followed by four months of nothing is worth less than $100 every month for a year, and it is far harder to sustain.

1. 1

   Round the repayment up

   Set the direct debit at a round figure above the scheduled amount. On a repayment of about $3,597, paying $3,700 is an extra $102.70 a month that nobody has to remember to make.

2. 2

   Bank the next pay rise

   Lift the repayment by the increase before you get used to the money. Your household never sees the change, and the loan gets the whole of it.

3. 3

   Start smaller than you think you should

   An extra $50 a month takes 13 months off that $600,000 loan and saves $30,691 in interest. Starting is worth more than starting big.

4. 4

   Review it when the rate moves

   If your rate falls and the repayment drops with it, leave the repayment where it was. That converts the rate cut into an extra repayment automatically.

Switching to fortnightly repayments is often sold as a way to do all of this at once. It only works where the lender sets the fortnightly figure at exactly half the monthly one, which quietly produces thirteen monthly payments a year instead of twelve. Our home loan repayment calculator page sets out why the usual version of that claim does not hold.

Whatever route you take, check the loan permits it before you set up the payment. That is what the next section is about.

Loans that limit how much extra you can pay

Not every loan accepts unlimited extra repayments. Variable rate loans generally do, and it is one of the quieter reasons people choose them. Fixed rate loans commonly do not.

A fixed rate is a contract to pay a set rate for a set period, priced on the assumption that the balance runs down at a set pace. Fixed loans therefore tend to cap extra repayments over the fixed term, and paying past the cap can trigger a break cost. The cap and the cost are set in your loan contract, and they differ between lenders and between products.

• Whether extra repayments are allowed at all during a fixed period
• The annual limit, if there is one, and what happens if you exceed it
• Whether a break cost applies, and how the lender calculates it
• Whether the extra reduces the balance or sits as advance payments
• What happens to any redraw balance when the fixed period ends

One common way around this is a split loan, with part of the debt fixed and part variable, and the extra repayments directed at the variable portion. It keeps some rate certainty without locking the whole balance away from you. Whether it is worth the extra complexity depends on how much you actually intend to pay.

What the panel is, and what it is not

The figures above are an estimate produced from what you typed, not an approval, and they take no account of the terms of your actual loan. They assume the rate holds for the whole term and that the extra repayment continues every period without interruption.

• Package and annual fees, which sit outside the repayment
• Lenders mortgage insurance, which is normally added to the balance
• Any redraw you make later, which puts the interest back
• Rate changes, including a fixed rate rolling off
• Caps on extra repayments written into your loan contract

We are brokers rather than a lender, working across a panel of more than 40 lenders under Australian Credit Licence 389083. Part of the job is checking whether your current loan will even let you do this, and whether a different one would beat the saving above without you paying a cent more.