The Benefits of Making Extra Mortgage Repayments

Owning a home is one of the biggest investments most people make, but it often comes with a large financial commitment in the form of a mortgage. While paying off a mortgage over time is common, making extra repayments can significantly reduce the overall amount paid and shorten the loan term.

In this guide, we’ll explore how these additional payments save money, reduce interest, and provide a sense of financial freedom sooner than expected.

How Extra Mortgage Repayments Save You Money

Mortgages accrue interest on the remaining loan balance, meaning that a substantial portion of early repayments covers interest rather than principal. However, when you make additional payments, those funds directly reduce the principal amount. This, in turn, decreases the interest that accrues in future periods, reducing the total interest paid over the life of the loan.

For example, with a $500,000 mortgage at a 4% interest rate over 30 years, the interest cost alone can reach around $359,000. Even modest extra repayments can lead to substantial savings.

Key benefits of making extra repayments:

• Reduced Interest Costs: By lowering the principal faster, you pay less in interest overall.
• Faster Loan Repayment: Additional payments allow you to pay off your loan ahead of schedule.
• Increased Financial Flexibility: Paying off your mortgage sooner can free up funds for other goals, such as investments, holidays, or retirement.

Reducing Your Loan Term

Making extra payments doesn’t just lower the total interest; it also shortens the loan term. With each extra payment, you’re paying down the principal more quickly, meaning you will reach your “mortgage-free” day sooner. This can be especially advantageous for homeowners nearing retirement, as reducing the loan term may allow them to retire without mortgage debt.

To illustrate, if a homeowner with a 30-year mortgage adds $200 a month to their repayment, they could pay off their mortgage about five years earlier than initially planned, depending on the loan terms and interest rate. This early completion reduces stress and provides financial security sooner.

Flexibility of Making Extra Mortgage Repayments

Most lenders provide flexible options to make extra repayments. It’s essential to check with your lender to ensure there are no penalties for additional payments, especially if you have a fixed-rate mortgage. Variable-rate mortgages tend to be more flexible with repayment options.

Some common options for making extra repayments include:

• Monthly Top-Ups: Adding a small amount to your monthly payment, such as $50 or $100, which can add up over time.
• Lump Sum Payments: Directing bonuses, tax refunds, or windfalls toward the mortgage for a larger principal reduction.
• Offset Accounts: Many mortgage packages offer an offset account, where deposited funds offset the mortgage balance, reducing interest while keeping the funds accessible.

Case Study: Savings from Extra Repayments

To provide a concrete example, let’s look at the potential savings from making an extra monthly payment of $200 on two different loan amounts, each with a 30-year term at a 4% interest rate.