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When you take out a home loan, you’re not just committed to repaying the initial cost of your new home. You’ll also have to pay the interest calculated on your loan balance each month. Over the term of your loan, this can translate into hundreds of thousands of dollars in addition to your principal amount. One proactive way you can reduce the total amount of interest you’ll pay – and repay your debt faster – is by making extra repayments to your home loan.

By paying extra, you can shave years off your loan term. Plus, you can shrink the total interest owed by tens of thousands of dollars, and potentially give yourself some extra financial flexibility, in case you need to access the extra funds you've paid towards your home loan in the future.

If making extra repayments sounds too good to be true, it’s not. It is, however, a financial habit that’s almost too worthwhile to ignore. Here’s how it works in more detail.

What happens when you pay more towards your home loan?

You can make extra repayments in a couple of different ways: 

More frequent repayments

Your loan requires you to make a monthly repayment, but by paying half of your monthly repayment each fortnight, you’ll make the equivalent of one extra month’s repayment in the year. The reason is that there are 12 months in a year, but 26 fortnights.

This could also be applied to weekly payments. If your repayment amount is $1,200 per month, that’s $14,400 at the end of the year. If you repay $300 per week, you’ll repay $15,600 after a year (52 weeks).

Review your budget

Another option is to review your budget to see where you could cut down your lifestyle expenses. Once you do that you can then divert a little more of your income towards your mortgage repayment.

Do you think you're unable to cut down your expenses enough to add an additional $100 or $200 to your home loan each month? Think again. A couple of simple lifestyle changes like cutting your grocery bill by $20 a week and eating out less can easily leave you with extra money. The long-term benefits of making a few small changes now could certainly pay off.

Make lump sum repayments

Another way to make extra repayments is to pay a lump sum whenever you have extra money. Maybe you get a bonus every year from work, or a good tax return, and can use this to pay down your mortgage faster?

By making lump sum payments when you can over the years and paying a little extra each month, the sky's the limit when it comes to how much you could save. You can try out our home loan repayment calculator yourself to find out how much you could save by paying a little extra each month, lump sums, or both.

What are the benefits?

If you make extra repayments to your home loan, you won’t just save money and give yourself more months (or years) to enjoy life mortgage-free, you’ll also gain more financial breathing room. If your home loan product includes a free redraw facility, you can withdraw the extra funds you’ve paid if you ever need them. This takes away some of the risks of devoting extra funds to paying down your home loan, rather than putting money into a separate savings account. You’ll benefit from a smaller interest burden on your mortgage, but you can still access your money when you need it.

This can also be a great financial habit if you’re not typically disciplined with your savings. Your lender may require you to get approval for every redraw, which means you’ll have to go through an extra step to get your money – which means you could end up being less likely to use it for frivolous spending.

As you pay down your home loan, you’ll also build up more equity. This can come in handy if you plan on investing in another property in the future.

When not to pay extra towards your home loan

If you have a fixed rate loan, you may not be able to pay extra towards it without having to pay a fee. And, depending on your home loan, there may be limits on how much extra you can pay each year.

Contact your bank or lender to find out the details of your loan before making any extra repayments, so you can avoid any penalties or fees.

Taking control of your future

When it comes to putting additional funds towards your home loan, choose what works best for your lifestyle and financial situation. Whether you can devote more of your income each payday, or you’d prefer to use any extra cash you earn or save as a lump sum payment, every extra dollar you put towards your home loan will help in the long term.

In the first few years of your loan, most of your repayment amount goes toward interest as the principal amount is still large, so the more you can pay off earlier on, the more impact you can make. Start making extra repayments early on and your future self will thank you!