Early repayment on your home loan doesn’t just reduce debt; it cuts interest costs and shortens your loan term. A few extra payments can save you thousands and give you financial breathing room years ahead of schedule.
Why Paying Off Your Mortgage Early Matters
A 30-year home loan might seem manageable when broken into monthly repayments, but over time, the interest adds up. On a typical loan, you could end up paying hundreds of thousands in interest alone. That’s why paying off your loan early can significantly reduce the total amount you owe.
Early repayment gives you flexibility, lowers your financial stress, and helps build long-term wealth sooner. It's not just about owning your home faster; it’s about spending less to get there.
How Mortgage Interest Works
When you repay a home loan, most of your early payments go toward interest, not the loan itself. That’s because interest is calculated daily on your outstanding loan balance. The larger your balance, the more interest you're charged each day.
This means the quicker you reduce the principal, the less interest your mortgage broker can charge. Over time, this shifts the balance so that more of your repayment starts hitting the principal, speeding up your debt reduction even more.
The Benefits of Early Repayments
Every time you make an extra repayment, you’re reducing the loan principal directly. This leads to compounding savings on interest and can shave years off your loan term.
For example, on a $500,000 loan at 5% over 30 years, paying an extra $316 a month could save over $100,000 in interest and cut nearly 5 years off your loan. These savings can grow even faster with consistent extra repayments, especially early in the loan term when interest makes up most of the monthly repayment.
Extra Repayments: What You Need to Know
You don’t need to come up with large lump sums to make an impact. Even small, regular extra payments like rounding up your repayment or matching your Netflix subscription can make a big difference over time.
Variable rate loans generally allow unlimited extra repayments. If you’re on a fixed-rate loan, you may face limits or break costs, so it’s important to speak to your mortgage broker first. Smart home loan strategies like these can help you take control early and avoid common traps.
Offset Accounts and Redraw Facilities
Offset accounts are transaction accounts linked to your mortgage. The balance in your offset account is deducted from your home loan when interest is calculated, so keeping money in there helps reduce your interest bill without making an official repayment.
Redraw facilities allow you to make extra repayments and withdraw the money later if needed. This gives you flexibility while still reducing your interest in the meantime. For more on these features, see how first home buyer loans work and what to look for in your loan setup.
Paying More Often: Weekly or Fortnightly Repayments
Switching from monthly to fortnightly or weekly repayments is a simple trick yet powerful and often overlooked home loan strategy: increasing repayment frequency to reduce overall interest and shorten the loan term. Here’s how it works:
Fortnightly Repayments: There are 26 fortnights in a year, which means by making half your monthly repayment every fortnight, you'll make the equivalent of 13 monthly payments instead of just 12. This results in reducing your loan principal faster, which leads to lower interest and can even shorten your loan term by several years.
Weekly Repayments: Paying weekly takes the process one step further, and while it can provide slightly more savings than fortnightly, the main benefit remains the same: reducing your average daily balance and therefore the amount of interest paid over time.
This strategy works by reducing the average daily loan balance, which reduces the compound effect of interest. The extra payments, whether weekly or fortnightly, help to chip away at your principal more quickly. Over time, this can save you thousands of dollars in interest and shorten your loan term.
Before switching your repayment frequency, be sure to speak with your mortgage broker. They can help you confirm any requirements or fees associated with changing repayment schedules.
Pro Tip: Always confirm with your lender that your fortnightly or weekly repayments are based on half of your monthly repayment, rather than a simple division of the annual repayment amount. This ensures you're making that extra payment each year, resulting in greater interest savings.
Making the Most of Windfalls and Bonuses
Tax returns, bonuses, and even small inheritances can be powerful when applied to your mortgage. Lump sum repayments cut your principal instantly and reduce the amount of interest you’ll pay moving forward.
Before putting a windfall on your home loan, check if there are any restrictions or fees. Your mortgage broker can help confirm how to apply the payment and ensure it’s used effectively.
Other Strategies to Pay Off Your Loan Faster
Paying off your home loan faster doesn’t just rely on making extra repayments. There are several other strategies that can significantly reduce your loan term and save you thousands in interest. Here’s a closer look at some of the most effective methods:
Refinancing to a Lower Interest Rate
Refinancing your home loan to a lower interest rate is one of the most powerful ways to reduce your mortgage payments over time. Even a small reduction in your interest rate, say 0.5%, can result in substantial savings. By securing a lower rate, you'll reduce the interest charged on your loan, helping you pay off the principal more quickly.
It's essential to compare different mortgage brokers and loan products regularly. Lenders offer competitive rates, and finding the best deal can make a big difference to your financial situation. Refinancing can also give you access to better loan features, such as an offset account or more flexible repayment terms.
Avoiding Lifestyle Inflation
When you receive an increase in income, it's tempting to boost your lifestyle and spending. However, maintaining your current lifestyle and using the extra money towards loan repayments can drastically reduce your mortgage term. Avoiding lifestyle inflation means the additional income goes directly to your loan, speeding up repayment and reducing the total interest paid over the life of your loan.
Using Budgeting Tools
Using budgeting tools or apps can help you keep track of your spending and prioritise your loan repayments. By maintaining a strict budget and dedicating more towards repayments, you can pay down your principal faster. Keeping an eye on your cash flow and ensuring you're spending within your means is crucial to achieving a faster repayment timeline.
Key Benefits of These Strategies:
- Refinancing can result in lower interest rates and reduced loan terms.
- Avoiding lifestyle inflation helps you redirect extra income towards the loan.
- Budgeting tools keep you focused on loan repayments and savings.
By implementing these strategies, you can make a significant impact on your ability to pay off your home loan faster and save money in the long run. If you’re looking to save money on your loan and pay it off faster, read Empower Money’s guide to getting the cheapest home loan interest rates.
Things to Watch Out For
If you’re on a fixed-rate loan, be aware of break costs before making extra repayments or refinancing. Some mortgage brokers also limit how much extra you can repay each year under a fixed term.
Review your mortgage broker’s policy and watch for hidden fees that could offset the benefits of early repayment. It’s worth reviewing the fine print or speaking to a broker before making changes.
Key Takeaways: How to Save on Your Home Loan
- Extra repayments reduce your principal and cut interest fast
- Offset and redraw accounts help reduce interest while staying flexible
- Small, consistent payments make a big difference over time
- Paying more often, such as weekly or fortnightly, can help shorten your loan
- Windfalls and bonuses are great for lump sum repayments
- Refinancing and better budgeting can accelerate your progress
- Always check for fees or restrictions before making extra repayments
Ready to Take Control of Your Home Loan?
Want a clearer strategy tailored to your situation? Speak with Empower Money to compare loan options, plan extra repayments, or explore refinancing without the jargon or pressure. Even small changes now can save you thousands down the track. The sooner you start, the bigger the impact.
