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Should you make extra repayments on your mortgage?
It isn’t long before many homeowners begin to ask themselves the big question: “should I start making extra payments on my mortgage?” Ironically enough, although most homeowners only begin considering the prospect once they have obtained greater financial flexibility, it can still be quite a daunting question to address on your own.

The key to answering the question lies in the reasoning itself. Why do you want to start making extra repayments? Whilst the thought of getting rid of that monetary cloud hanging over your head even the slightest bit earlier seems like the golden ticket, there are also situations where it wouldn’t necessarily be beneficial.

Situations where extra repayments make sense:
Shortening your loan term
Let’s start with the obvious. Making additional principal payments will shorten the length of your mortgage and help accumulate equity at a faster rate. Since the overall balance is being paid back faster, you’ll have fewer payments to make and thus, more opportunities to save money a little later down the line.

Saving on interest
Your interest rate is calculated via the balance remaining on your home loan. Making additional monthly repayments can help to drastically lower your interest payments over the duration of the loan.

If your mortgage has a variable rate it may be a good idea to start paying extra each month, as variable rate home loans typically reset at predetermined fixed points throughout the loan. This means that when the loan resets, paying off more of the principal sum early increases the amount of equity you have, thereby saving on interest before the reset cutoff.

Situations where you may want to reconsider:
Other debt repayments or fees
If you have outstanding credit card debt, it’s likely that you won’t be able to commit any expendable cash toward your mortgage repayments. It’s worth considering the debts that have higher rates compared to your home loan, such as credit card debt or short-term business loans.

Better off investing
In certain situations, you may be positioned to gain more by using the additional repayment amounts in other ways. One such example is a long-term investment account or portfolio for the retirement fund. If the monetary benefits from paying off your mortgage earlier cannot be realised until you sell the home, investing that money may be a wiser alternative.

Refinancing opportunities
Refinancing may not be a direct alternative to investing that extra cash, but the fact of the matter is that refinancing at an opportune time could still save you more and help you reserve your money for investments. To find out how much you could potentially save by refinancing your mortgage, check out our home loan products or send us an inquiry about your specific situation here.

Although making those extra loan repayments may seem like a no-brainer, you need to consider the other options available to assess whether or not making repayments are the right move for you. Ultimately, there are many other ways you could potentially save on your mortgage or solidify your financial situation.

Using the above calculator will ensure that you have a firm understanding of exactly how much you could save by making additional repayments so you can fully weigh up the pros and cons for your specific financial situation.

This extra repayment calculator takes into account the details of your loan including:

• Loan amount
• Interest rate
• Loan term
• Repayment frequency (weekly, fortnightly or monthly repayments)

Once these fixed variables have been inputted, simply enter the extra contribution amount to observe the time and interest you can save.

Important information to consider
1. The information provided by the calculator is merely intended to illustrate the situation based purely on stated assumptions and your inputs. It is not personal advice. These calculations are only meant to serve as an estimation and it is highly recommended that you consult a financial adviser or loan specialist about your specific financial situation.

2. This calculator does not take into account the costs associated with terminating or modifying your current home loan. It is recommended that you check the terms and conditions or product disclosure statement of your current loan and consult the relevant credit provider about any fees, as well as the effect any changes could have on your broader financial and personal circumstances.

3. There are some important assumptions to note in regards to the use of this calculator.

• The interest rate does not change over the loan term, i.e. assumes a fixed loan
• Interest is calculated by compounding on the same repayment frequency selected (weekly, fortnightly, monthly) this may not be the case for your specific home loan
• No rounding is performed in the calculation process (usually repayments are rounded to the nearest cent)
• A year consists of 26 fortnights or 56 weeks which is processed as 364 days rather than 365 or 366
• The final repayment after the increase in repayment amount will be a partial payment that is required to reduce the balance remaining to zero without negative owing amount

An extra repayment calculator can give you an estimate of what your repayments could be based on your specific home loan amount, interest rate, loan term, and personal objectives. Once you find out how much additional repayments you can feasibly make, you can start comparing the advantages of early repayments to other investments so that you can optimally leverage that extra cash to maximise those savings.

There are a multitude of ways you can set up additional repayments, from lump-sum payments to offset accounts. Below we have listed a few of the most common methods people use to make additional loan repayments

Standard additional repayments
You can contribute extra repayments on your fixed home loan of up to $20,000 per annum without penalties, any additional payments above this threshold may incur break costs. On your variable home loan, you can make unlimited additional payments without penalties, if you full re-pay the home loan you may incur a discharge fee.

Offset account
The amount of money you have deposited into an offset sub-account is counterbalanced against the remaining balance of your loan and hence, interest is only charged on the difference.

This means that if your remaining loan is $200,000 and you have $80,000 in your offset sub-account, then you will only be charged interest on the difference of $120,000. This is why offset accounts are generally one of the most popular options. It can help you pay off your mortgage sooner, but also allows for flexibility, since you can still withdraw and use the money when necessary.

Salary or lump sum deposits
Any amount of money that is held in your offset sub-account can be leveraged to save you time and interest on your loan. Having your salary directly deposited into your offset account can be a great way to prevent yourself from overspending or give you that extra bit of motivation to save toward paying off that mortgage.

Additionally, any significant amount of cash obtained such as a performance bonus, or tax return should go straight into the offset account as a lump sum in order to maximise the potential that it has to save you money.

Since having more money in the account leads to lower interest rates, even keeping your savings in there temporarily can help yield unexpected benefits. Maybe you have a holiday fund set up, or maybe you’re saving toward the dream car. Whatever it is, until you’re ready to break the piggy bank, it’s worthwhile keeping the money in your offset account to minimise your interest payments.

Ultimately, making extra repayments can prove to be beneficial, but it is essential that you consider all of your options beforehand. Extra repayments are not the only way you can shorten your loan term or bolster your savings. There are a myriad of options that may be better suited to your specific financial situation such as depositing into an offset sub-account, making more frequent payments, or investing in long-term opportunities.

If you do find yourself struggling to assess your financial situation, the above extra repayment calculator can help you identify which option may be best for you. If you are merely weighing up your options before purchasing a house, then head over to the Homestar Finance home loan calculator to help get your foot in the door.