Extra repayments on a home loan: what they do

Resources · Home loans and saving · 5 min read Building

Key points

• Every extra dollar goes straight to the balance, so it stops attracting interest from then on.
• Small regular extras made early can cut years off a long loan.
• Once money’s in the loan it’s usually harder to get back, so flexibility matters.
• Whether extras suit you depends on your other debts, your savings and your plans.

How extra repayments on a home loan work

Making extra repayments on a home loan is one of the simplest money moves there is. Here’s why it works so well.

Your required repayment is set so the loan finishes exactly on schedule (see how a home loan repayment works). Each month it covers that month’s interest, and whatever’s left chips away at the balance.

Pay more than the required amount and the extra doesn’t go to interest. That month’s interest is already covered. Every cent of the extra comes off the balance.

A lower balance means a smaller interest charge next month. So more of your next regular repayment goes to principal too. And that knock-on effect repeats every single month for the rest of the loan. That’s why extras punch well above their size.

A worked example

Here’s what we’re assuming:

• Loan: $400,000
• Interest rate: 6% a year, charged monthly
• Term: 30 years
• Required repayment: $2,398.21 a month
• The extra is paid every month from the start, and the rate never changes

The same maths works in any currency.

Look at the $100 row. That’s about $32,400 paid in over 27 years, and it saves $55,757.42 in interest. You save more than you put in, because each extra dollar dodges interest for years and years.

One-off lump sums

Lump sums work the same way. On the same loan, put an extra $10,000 in at the very start (then pay just the required amount) and the loan is paid off in 28 years and 1 month. Total interest falls to $416,474.18. That’s $46,873.80 less.

Timing is everything here. The earlier a lump sum goes in, the more years it has to avoid interest. The same $10,000 paid in year 25 would save far less.

Two ways lenders apply extras

Depending on the loan and the country, your extras get handled one of two ways.

In the first, the term shortens. Your required repayment stays put and the loan finishes sooner. That’s what the table above shows, and it saves the most interest.

In the second, the repayment drops. The loan is recalculated so the end date stays the same but your required repayment falls. Less pressure each month. Less interest saved overall.

Some loans let you pick. Your loan documents explain which one applies to you.

Limits and rules to know about

Rules on extra repayments vary a lot, by loan type and by country. Many variable-rate loans allow extra repayments, often with no annual cap. Fixed-rate loans often cap extras at a set amount each year, or charge a fee above that cap. In some countries, paying a loan off early can trigger a prepayment charge, especially on fixed deals.

Then there’s getting the money back out. Some loans have a redraw facility, which lets you take extra repayments back out. Others don’t, and once the money’s in, it stays in.

Read the terms before you start. No surprises that way.

The trade-offs

Extra repayments cut interest with no risk on the “return”, because the saving is simply interest you don’t pay. Hard to argue with that. But it’s not the only thing to weigh.

Access to the money. Without a redraw or offset feature, extra repayments can be hard or impossible to get back in an emergency. Some people build an emergency fund first for exactly this reason.

Other debts. Carrying a credit card or personal loan at a higher rate? Then every dollar sent there avoids more interest than a dollar sent to your home loan. Some people clear those first.

Other goals. Money in the loan isn’t available for a car, a course or retirement savings. Some people split their spare cash between goals instead.

Rate changes. If rates rise, the extras you’ve already made shrink the balance the new rate applies to. If rates fall, each extra dollar saves a bit less.

There isn’t one answer for everyone. It depends on what else you owe, how secure your income feels, and what matters most to you.

Small amounts still count

You don’t need big sums to make a dent. Some people round their repayment up to the next hundred. Others keep paying the same amount when the rate falls, instead of letting the repayment drop. Tossing in part of a tax refund, a bonus or a pay rise works too.

Each one lowers the balance a little sooner. And the effect keeps building for the life of the loan.

Common questions

Is it worth making extra repayments on a home loan?

It depends on your other debts, savings and plans. Extras cut interest with no risk on the saving. But without a redraw or offset feature, that money can be hard to get back.

Do extra repayments reduce the term or the repayment?

It depends on the loan. Some shorten the term and keep the repayment the same. Others lower the repayment and keep the end date. Your loan documents explain which applies.

Can you make extra repayments on a fixed-rate loan?

Often only up to a cap each year, or with a fee above it. In some countries, paying off a fixed deal early can trigger a prepayment charge.

Try it

The home loan extra repayments calculator shows how much time and interest a regular extra or a lump sum could save on your own numbers. Got several debts? You can also find your Freedom Date.

General information only, not financial advice. Your situation is your own.