Should I Be Making Additional Repayments On My Mortgage?

Taking on a mortgage is a huge financial commitment. And with all of the recent interest rate rises, many Australian households don’t have a whole lot left in the bank once the bills and essentials have come out of their account. But if you do find yourself with some savings, it could be worth chipping in a little extra towards your home loan.

Read on to find out more about how paying extra on your mortgage could save you over the life of your loan.

How do extra repayments work?

Your home loan is made up of two parts: 

1. The principal: this is the amount that your bank has agreed to lend you, and
2. The interest: which is how much it costs to take out your loan.

When you first took out your loan, you would have nominated how often you’d like to make your mortgage repayments, whether that be weekly, fortnightly or monthly. You also would have agreed to a certain loan term. Based on the length of your loan, your bank would have calculated your minimum mortgage repayments. 

As the borrower, it’s up to you to stay on top of your home loan and meet your minimum mortgage repayments. But if you can afford to, you can often contribute a bit extra towards your loan to help pay it off quicker.

It’s important to note that the ability to make extra repayments on your mortgage isn’t available with all home loan products. While most variable home loans will allow you to make unlimited additional repayments, fixed rate loans will often have extra repayment caps in place or fees for making additional repayments. 

Benefits of making extra repayments

Paying extra on your mortgage can provide different benefits that could ultimately help you save over the life of your loan. Here are just some of the key advantages of making extra repayments:

• Interest savings: By paying more than your required minimum repayment, you’re able to chip away at your principal balance faster. Since interest is calculated on the remaining principal, reducing it sooner means you'll pay less interest over the life of the loan. Not to mention, these extra repayments can help to reduce the overall term of the mortgage, leading to substantial interest savings over the life of your home loan.

• Loan term reduction: Extra repayments can significantly shorten the loan term. For example, a 30-year mortgage can potentially be paid off in 25 years or even less with consistent extra repayments. Paying off your mortgage early gives you more financial freedom and reduces your long-term financial commitments.

• Increased equity: Extra repayments increase your equity in the property faster. Higher equity can provide financial leverage for future investments or improvements. With more equity, you might have the option to access a home equity loan or line of credit, which can be useful for renovations, investments or other large purchases.

• Financial flexibility and security: Extra repayments can act as a buffer against future interest rate increases. If interest rates rise, having made extra payments can mean lower interest costs compared to if you had only made the minimum repayments. If your home loan comes with a redraw facility, you can withdraw extra repayments down the line if needed. This can provide a safety net in case you come up against unexpected financial difficulties.

How to make extra repayments on your mortgage

When it comes to making extra repayments towards your home loan, you’re essentially just paying off more than your minimum repayments. It’s up to you to decide how you’d like to make extra repayments towards your mortgage. 

You can choose to set up an automatic transfer into your home loan each week, fortnight or month depending on what works for you. Alternatively, you might decide to transfer over a lump sum payment come tax time or at any other stage where you find yourself with a bit of a windfall. You can even elect to make more frequent repayments, like weekly or fortnightly instalments rather than monthly to squeeze in a couple of extra repayments each year without breaking the bank. 

A quick note before you make any extra repayments

Before you start throwing more money into your home loan, it’s worth checking to see that your loan allows you to make extra repayments. 

Start by double-checking the terms and conditions to make sure your mortgage doesn’t have any penalties for extra repayments or early loan payoff. While some lenders will allow you to make unlimited additional loan repayments, others have limits in place and will penalise you if you go over the cap. It’s also important to make sure that you leave yourself with enough cash in the bank in case of emergencies, so don’t burn through your savings to make extra loan repayments. 

Weigh up the opportunity cost of making extra repayments versus other potential investments or financial goals that could offer higher returns. At the end of the day, everyone’s financial situation is different, so it’s important to make a decision that works best for you. 

With an Unloan home loan, you can choose to make additional repayments above your minimum scheduled repayments. Plus, with our redraw facility, you can tap into these extra repayments at any time. Learn more about our home loan today, or check out the eligibility criteria. 

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This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking independent taxation and financial advice before making any decision based on this information.‍

Unloan is a division of Commonwealth Bank of Australia.

Applications are subject to credit approval; satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000. 

Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.

There are no fees from Unloan. However, there are some mandatory Government costs depending on your state when switching your home loan. For convenience, Unloan adds this amount to the loan balance on settlement.

Other third-party fees may apply. Government charges may apply. Your other lender may charge an exit fee when refinancing.