Lump sum repayment calculator

What a lump sum payment does to a home loan

Interest is charged on whatever the balance is at the time, so a smaller balance costs less from the very next period. A lump sum skips the usual split between interest and principal entirely. All of it comes off the debt.

On a $500,000 balance at 6% with 25 years remaining, the scheduled repayment is about $3,222 a month and the loan costs $466,452 in interest if nothing changes. Pay $20,000 today and the balance drops to $480,000, the repayment stays at $3,222, and the loan finishes in 22 years and 10 months.

That is the default treatment, and it is where the whole $63,838 comes from. There is a version where the lender does something else with it, covered further down, and it is worth knowing about before you transfer the money.

Timing a lump sum mortgage payment is worth more than the amount

The saving on a lump sum is the interest it prevents, and interest only accrues on the years still ahead of you. Pay it late and there are fewer of those years left for the money to work on.

Every row is the same $500,000 balance at 6% with 25 years to run, and the same $20,000. Holding the money for ten years costs $36,419 of the saving, on cash you already had.

None of which means empty the savings account this afternoon. It means that if the money is genuinely spare, the delay is the expensive part, not the decision.

Where the money usually comes from

Almost nobody sits down and decides to make a lump sum repayment. Something lands, and the question becomes what to do with it.

• A tax refund, which arrives at roughly the same time every year and is easy to plan around
• A work bonus or commission payment, usually after tax has already taken its cut
• An inheritance, where there is often no hurry and every reason to take advice first
• Proceeds from selling a car, a bike or anything else that was sitting in the driveway
• A redundancy payment, where keeping cash accessible normally matters more than the interest

The arithmetic above holds for all of them. What differs is whether the loan is the right home for the money, and the honest answer changes with the source. A redundancy payment and a tax refund are not the same decision.

If you are carrying debt at a higher rate than your mortgage, that debt is usually the better target. Clearing a car loan or a card balance saves more per dollar than clearing home loan principal, and it frees up a repayment as well.

Whether it should go into an offset account instead

An offset account holds your money in an account linked to the loan, and interest is charged on the loan balance less whatever is sitting in the offset. $20,000 held in an offset reduces the interest charged by the same amount as $20,000 paid onto the balance.

The difference is access. Offset money is yours to withdraw whenever you want it. Money paid onto the loan comes back only through redraw, if redraw is available, and on the terms in your loan contract.

1. 1

   If there is any chance you will need it back

   Use the offset. The interest result is the same and you have not handed the money to the lender to release at their discretion.

2. 2

   If it is genuinely spare and long term

   Either works. Paying it onto the loan removes the temptation to spend it, which for some households is the whole point.

3. 3

   If your loan has no offset account

   Then a lump sum with redraw is the practical option, and worth asking what an offset would cost to add or whether another loan would carry one.

The calculator models the payment going onto the balance, because that is the version with a shortened term attached. An offset of the same size produces the same interest saving without the term changing on paper.

Making sure the term shortens instead of the repayment

After a lump sum the scheduled repayment normally stays where it was, and the loan simply finishes early. Some lenders will instead recalculate the repayment downwards over the original term if you ask them to, and a few will do it as a matter of course.

That second version undoes most of the benefit. On the same $500,000 loan, resetting the repayment after a $20,000 lump sum drops it by about $129 a month and cuts the interest saving from $63,838 to $18,658. You paid the same money and kept less than a third of the result.

If the repayment does come down and you did not want that, the fix is usually to keep paying the old amount voluntarily. That converts the difference into a regular extra repayment, which our extra repayment calculator covers in full.

Before you hand the money over

A short list is worth checking before the money moves, and every item on it is answered by your loan contract or one call to your lender.

• Whether the loan is fixed, since fixed loans commonly cap extra payments over the fixed term and charge a break cost above the cap
• Whether redraw is available on the money afterwards, what the minimum redraw is, and whether the lender can restrict it
• Whether the payment reduces the balance immediately or sits as payments in advance
• Whether the repayment will be left alone or recalculated downwards
• Whether a higher-rate debt should get the money before the mortgage does

Everything on this page is an estimate worked out from the figures you entered. It is not an approval, and your lender's own terms decide what actually happens to the money. We are brokers with a panel of more than 40 lenders behind us and Australian Credit Licence 389083, so if the loan you hold is the wrong place to put a lump sum, we will tell you that rather than sell you something.