The Pros and Cons of Paying Off Your Home Loan Faster

Paying off your home loan faster usually comes down to one thing: reducing the balance that interest is charged on, for as long as possible.

For many South Yarra homeowners, that does not mean sending every spare dollar to the bank. It means choosing a loan structure that rewards extra effort and still leaves you room to move if life changes. Below are the main options, along with what each one costs you.

How Can You Pay Off a Home Loan Faster?

You can pay off a home loan faster by paying more than the minimum, paying more often, or holding savings against the loan so less interest is charged. Each approach works because interest is calculated on the balance you owe.

The three common methods are:

• Adding a set extra amount to each repayment.
• Switching to fortnightly repayments, where you pay half the monthly amount every two weeks. That adds up to 26 half payments, which equals 13 monthly repayments in a year.
• Keeping spare cash in a linked offset account.

The trade-off is access to your money. Cash paid into the loan is not always easy to get back, depending on whether the loan has a redraw facility and how your lender sets it up.

Extra Repayments on a Variable Rate: The Pros and Cons

Extra repayments on a variable rate loan generally reduce your balance and your interest. The cost is that your rate can move up or down, and that money is tied up in the property.

Most variable rate loans allow additional repayments without penalty. Some fixed rate loans limit how much extra you can pay, so check the terms before you commit. On an owner occupied home loan with principal and interest repayments, every extra dollar lowers the balance that future interest is based on.

An interest only period works the other way. Repayments are lower during that period, but the balance does not fall, and repayments rise once principal and interest begins. It suits some investors and short-term plans. It does not suit someone whose goal is to clear the loan sooner.

How an Offset Account Works: A South Yarra Example

An offset account is a transaction account linked to your loan. The balance in it is subtracted from your loan balance when interest is calculated, so you pay interest on less while keeping your cash accessible.

As an illustrative example, consider a South Yarra owner with an $800,000 loan on a 30 year principal and interest term. At an illustrative rate of 6.75% p.a., the monthly repayment is about $5,189. This owner keeps $60,000 of savings in a linked offset account instead of a separate savings account, perhaps to cover renovations around Fawkner Park or a future school fee.

Interest is now calculated on $740,000, not $800,000. At the same illustrative 6.75% p.a., that is about $4,050 less interest charged over a year, as long as the $60,000 stays in the account. The repayment amount stays the same, so more of each payment goes to principal. The owner can still withdraw the $60,000 if they need it.

The cost is that loans with offset accounts can carry an annual package fee or a higher rate than basic loans. Before choosing one, compare the total cost of the loan with the interest you would expect to save, based on the balance you will realistically keep in the account.

Fixed Rate, Variable Rate or Split Rate: Which Suits Faster Repayment?

A variable rate suits faster repayment because it usually allows extra repayments and offset accounts. A fixed rate offers certainty but often limits both.

A split rate home loan divides the balance into a fixed portion and a variable portion. The variable side can take extra repayments and sit alongside an offset account. The fixed side gives you a repayment that will not change during the fixed term. The trade-off is that you have to manage two loan balances, and a fixed portion may carry break costs if you repay it or refinance early.

If your fixed term is ending soon, the fixed rate expiry options are worth looking at early. That way you choose the next structure on purpose, and do not end up on a default rate.

When Does Refinancing Help You Repay Sooner?

Refinancing can help when your current loan lacks features such as an offset account, or when another lender offers a lower rate or lower fees. It does not help if the switching costs outweigh the interest you would save.

A loan health check is a sensible first step. It compares your current loan with products from the lenders on your broker's panel. If you decide to switch, our refinancing page explains how that process works. Costs to weigh include discharge fees, any fixed rate break costs, and the time a new application takes. Lenders will also reassess your income, expenses and loan to value ratio, so your borrowing capacity matters even if you are not borrowing more.

Is Paying Down Your Loan Always the Right Priority?

No. Paying down your loan makes sense when you also hold enough accessible cash for emergencies and near-term plans. A loan that is very low but leaves you short of cash can cause problems.

A calm, long-term approach usually keeps a buffer in an offset account, then adds regular extra repayments on top. This gives you flexibility without giving up progress. If you are weighing extra repayments against investing, or against other goals, it is worth talking it through with your broker and, for tax questions, your accountant.

Our home loans page outlines the structures we work with, and our South Yarra mortgage broker team can look at your loan alongside your wider plans. Call one of our team or book an appointment at a time that works for you, and we will review your loan and show you which changes would suit your situation.

Frequently Asked Questions