Why Make Additional Repayments?
The ability to make additional repayments on a home loan is an important consideration for anyone taking a loan as regular additional repayments have the potential to save thousands of dollars over the life of your loan. Making additional repayments significantly reduces the length of the loan, resulting in potentially huge savings in interest charges.
At the beginning of a Principal and Interest loan, most of the scheduled repayment goes toward paying the interest portion of the loan. Any additional payments you make go towards paying off the principal loan
amount. As the Principal debt reduces, the interest the following month is calculated on a lower amount therefore reducing the interest charges. Small additional repayments every month have a significant impact over time.
If you do not have the ability to make consistent additional repayments, making extra repayments when you can will still help reduce the life of your loan and reduce your interest charges – in most cases you can access the additional repayments via redraw if necessary. Some Fixed Rate loans do not allow redraw during the fixed rate term, so if you intend to make additional repayments, and need the ability to redraw, be sure to check this feature exists before selecting the loan. Most variable rate loans have free redraw options.
Example: $100 per month Additional Repayment
No Additional Repayments:
- $400,000 Home Loan
- 5.32% pa (variable)
- With a 30 year loan term
No additional repayments it will take 30 years with regular monthly Principal and Interest repayments of $2,226 per month to pay off this loan.
Additional Repayments:
- $100 per month
- $400,000 Home Loan
- 5.32% pa (variable)
If $100 per month is made as an additional repayment from the outset of the loan (Principal and Interest repayments of $2,326 per month) it will reduce the loan term by 2 years and 11 months, and save $45,816 in interest over the life of the loan.
