Benefits of Making Extra Repayments

By Matthew Kenworthy | Finance Tips

Interest rates are currently at record low levels. Whilst it appears that this may be the case for the foreseeable future it won’t last forever and eventually interest rates will rise.

If you are looking to get ahead on your loan repayments, there is no better time than the current low interest rate environment to do so.

We’ve outlined a few methods some of our clients are using to get ahead on their home loans.

For all of the examples below, we have calculated Principal & Interest repayments using a loan amount of $400,000, an interest rate of 4.50% and a loan term of 30 years. The interest rate we have used for these examples is higher than many of our clients are currently paying.

Making Fortnightly Repayments

Consider making your payments fortnightly for half the monthly amount.

A regular monthly repayment is $2,027 while the true fortnightly repayment is $935. If you were to simply halve the repayment to $1,013.50 and make this your regular payment, this would calculate out to making 1 extra monthly repayment each year and would reduce your overall loan term by around 6 years.

If you are getting paid fortnightly this is a relatively simple method to get ahead on your repayments and you might not even notice the difference.

Fixed Extra Repayments

Alternatively you may look to pay a set amount extra per month above your minimum repayment.

The list below shows the effect of making various extra repayments amount can have in reducing your loan term.

  • $100 Extra per month: Making an extra repayment of $100 per month in the aforementioned scenario would reduce your loan term by 2.8 years.
  • $200 Extra per month: Making an extra repayment of $200 per month in the aforementioned scenario would reduce your loan term by 5.0 years.
  • $300 Extra per month: Making an extra repayment of $300 per month in the aforementioned scenario would reduce your loan term by 6.9 years.
  • $400 Extra per month: Making an extra repayment of $400 per month in the aforementioned scenario would reduce your loan term by 8.5 years.
  • $500 Extra per month: Making an extra repayment of $500 per month in the aforementioned scenario would reduce your loan term by 9.9 years.

Repay Based on a Higher Interest Rate

Finally you may look to base your repayments on repaying the loan at a higher interest rate.

Most lenders actually assess your loan at a rate more than 2% higher than the interest rate on application, just to make sure that you can still afford to make your payments when the interest rates do inevitably rise.

At the current point in time, most lenders are assessing loans at a minimum of 7.25%. If you were able to make repayments based on this rate, your monthly repayments would be $2,729 and the extra contributions of $702 would shave 12.2 years off your total loan term.

It is important to note that making extra repayments on your loan is only appropriate for variable rate loans and you would need to be aware of the limit on these repayments if your loan is fixed.

Another step you can take to pay off your home faster is to be paying a lower interest rate. If you’re interested in refinancing your home loan please get in contact with us. We can help find you the right loan for your situation.

About the Author

Matthew Kenworthy is a specialist in all aspects of Residential & Commercial Finance. He can assist all borrowers from First Home Buyers to Property Investors with Large Portfolios.