Why should you consider extra home loan repayment strategies

Understanding Extra Repayment Strategies

Making additional repayments on your home loan represents one of the most effective approaches to reduce both your loan term and total interest payments. When you access home loan options from banks and lenders across Australia, understanding how extra repayments work can significantly impact your financial situation over the life of your loan.

Extra repayments involve paying more than your required monthly amount towards your loan principal. This strategy works regardless of whether you have a variable interest rate or fixed interest rate home loan, though the implementation may differ between loan types.

Benefits of Making Extra Repayments

The advantages of implementing extra repayment strategies extend far beyond basic interest savings:

• Reduced Interest Costs: Every additional dollar you pay goes directly towards reducing your loan amount, which decreases the interest calculated on your remaining balance
• Shorter Loan Term: Extra repayments can reduce a 30-year loan by several years, depending on the additional amounts paid
• Increased Home Equity: Building equity faster provides more flexibility for future property decisions
• Interest Rate Protection: If you have variable home loan rates, extra repayments provide a buffer against potential rate increases

Types of Extra Repayment Strategies

Weekly or Fortnightly Payments

Switching from monthly to more frequent payment schedules can create substantial savings. When calculating home loan repayments on a fortnightly basis instead of monthly, you effectively make 26 payments per year instead of 12 monthly payments, resulting in the equivalent of one extra monthly payment annually.

Lump Sum Payments

Utilising tax refunds, bonuses, or inheritance to make lump sum payments can dramatically reduce your loan balance. These payments have an immediate impact on your home loan interest rate calculations for future payments.

Percentage-Based Increases

Increasing your repayments by a small percentage each year, particularly when you receive salary increases, ensures your extra payments grow with your income capacity.

Using Offset Accounts Effectively

An offset account functions as a transaction account linked to your home loan, where the balance offsets the loan amount when calculating interest. This strategy provides flexibility while delivering similar benefits to extra repayments.

For example, if you have a $400,000 loan amount and $50,000 in your offset account, you only pay interest on $350,000. This approach allows you to access your funds while reducing interest costs.

Considerations for Different Loan Types

Variable Interest Rate Loans

With variable home loan rates, extra repayments typically offer maximum flexibility. You can usually increase or decrease additional payments without penalties, making this loan type suitable for fluctuating income situations.

Fixed Interest Rate Loans

Fixed interest rate home loans may have restrictions on extra repayments, often limiting additional payments to specific amounts annually. Review your loan terms before implementing extra repayment strategies.

Impact on Borrowing Capacity

Making extra repayments improves your loan to value ratio (LVR) by reducing your outstanding debt faster than standard repayments. This improvement can help you:

• Avoid lenders mortgage insurance (LMI) when refinancing
• Access interest rate discounts available for lower LVR brackets
• Increase borrowing capacity for future property purchases
• Improve your position when applying for a home loan for additional properties

Calculating Your Potential Savings

When determining how extra repayments might benefit your situation, consider these factors:

1. Your current home loan interest rate
2. Remaining loan term
3. Available funds for additional payments
4. Your broader financial goals

Many lenders provide online calculators to demonstrate potential savings from extra repayments, helping you understand the long-term benefits of different payment strategies.

Professional Guidance for Your Strategy

Developing an effective extra repayment strategy requires understanding your specific financial situation, loan terms, and long-term objectives. The application process for optimising your current loan or exploring new home loan options should consider how extra repayments align with your overall financial plan.

Mortgage brokers can help you access home loan options that support your repayment strategy while ensuring you maintain appropriate cash flow for other financial commitments. They can also assist with home loan pre-approval processes if you're considering refinancing to a loan product that offers enhanced extra repayment features.

Implementing extra repayment strategies can transform your mortgage from a long-term financial commitment into a more manageable debt that builds wealth through increased home equity. Whether you're buying a home or reviewing your existing loan, understanding these strategies empowers you to make informed decisions about your mortgage repayments.

Call one of our team or book an appointment at a time that works for you to discuss how extra repayment strategies can benefit your specific circumstances.