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Making either once-off or ongoing additional home loan repayments can help to shave both money and time off the term of the loan, helping you potentially pay a smaller total loan amount and less in total interest.
You may also simply come into a windfall and decide that, based on your financial situation, paying down your home loan is the best use for it right now, rather than saving it or going shopping.
For example, depending on your home loan interest rate and the current savings account interest rate landscape, it may be the case that the amount of interest you’d earn by putting the lump sum in a savings account would be outweighed by the amount of interest you’d save by putting the lump sum towards your home loan. In this case, you may decide that a lump sum home loan repayment is your best option.
The type of home loan you have will determine whether you can make unlimited additional home loan repayments. If you have a variable rate home loan, you can usually make as many lump sum payments as you like!
However, if you’re on a fixed rate home loan, you’ll likely have an annual cap on the total amount you can make in additional home loan repayments, and exceeding this cap will incur a fee. So, feel free to still make the occasional additional repayment if you can, but be sure to check what your annual limit is before doing so.
If your home loan has a redraw facility, you’ll be able to access the lump sum amounts you’ve contributed to your home loan so far, provided they were entirely additional. If a portion of your lump sum contributions was used to cover outstanding repayment amounts or fees, you will not be able to access and redraw those funds.
There aren’t any set-in-stone upsides and downsides of making lump sum mortgage repayments; it boils down to what’s right for you based on your financial situation and priorities.
For example, consider the loan purpose – is your home owner-occupied or is it an investment property? If it’s the latter and you have more than one mortgage, you may be less determined to pay an investment mortgage down, especially when posting a loss on it for the year could potentially reap you a tax advantage in the form of negative gearing.
Are home loan rates high at the at the moment? If so, you might want to put a lump sum towards your home loan to pay down your principal and try to counterbalance the higher interest charges you’re currently paying.
Or you may decide you simply don’t have space in the budget for it! An important pre-qualification for making lump sum home loan repayments is having the money in the first place and being able to comfortably part with it. If there’s something else you’d rather put the money towards, or you’re wary of parting with a large sum of money in one go, making lump sum mortgage repayments may not be the right choice for you.
You may want to speak to a mortgage broker or financial adviser before making a decision one way or the other.
If you have the capacity to do either, the answer will come down to your personal preferences and what’s easiest for you. Would you rather boost your weekly, fortnightly or monthly repayments on an ongoing basis, or keep them at the minimum required amount and make a lump sum contribution?
If you have a lump sum sitting around and not doing anything for you, you may want to consider putting it towards your home loan in the form of a lump sum repayment. If you’d still like to make progress on your home loan but would rather not part with or simply don’t have a large lump sum to contribute, making smaller ongoing extra mortgage repayments may be an option worth thinking about.
Borrowers on fixed rate home loans can typically make lump sum repayments, but only up to an annual limit. The value of this limit will depend on the loan details of the particular product you have, so either check the key fact sheet (KFS) or enquire with your lender to find out how much you can make in lump sum repayments.
If you pay your mortgage off early with the help of additional repayments, you will likely pay a discharge fee to your lender in order to have your home loan released. Additionally, if you’re on a fixed rate home loan, you may also pay a break fee for closing the home loan within the fixed rate period.
Check with your lender to find out what fees or charges you might have to pay if you close your mortgage early.
Assuming you have no outstanding interest charges or fees that need paying, any additional home loan repayments you make will generally go towards your home loan principal (the amount you borrowed), which will subsequently see your overall loan balance – including interest and fees – decrease.
If you have any outstanding fees or interest charges that do need paying, the amount will be deducted from any additional repayment you make.
Making a lump sum repayment will generally be as simple as moving the money in question from your transaction account, or wherever it may be, to your home loan account.
This process may vary depending on your lender, so contact them if you have any questions about it.