How to calculate benefits of a lump sum home loan payment

Calculating how much a lump sum repayment could benefit you over the life of your home loan, is as simple as plugging these details into InfoChoice’s Lump Sum Calculator:

  • The type of home loan you have
  • The balance of your loan
  • Your loan’s term
  • Your home loan interest rate
  • How often you make repayments
  • The size of the lump sum you wish to put down
  • When in the lifecycle of your home loan you plan to do so

If you’d rather keep your extra cash tucked away safely, you might choose to pay extra on your regular repayments instead of making a lump sum repayment.

If that’s the case, you could use InfoChoice’s Extra Home Loan Repayment Calculator to compare the benefits that each approach could bring.

What is a lump sum repayment?

A lump sum repayment is simply a ‘lump’ of cash used to pay off a chunk of a person’s home loan. By paying off a decent portion of their mortgage in one go, a homeowner could potentially save thousands in interest and shorten the life of their loan.

That’s particularly true in the early years of a loan’s life, since the portion of debt paid off in a lump sum isn’t accruing interest as the years and decades go on.

So, if you’ve found yourself with a handful of extra money – say, from the sale of a car or another property, a gift or bonus, an inheritance, or some other reason – it might be worth considering using it to reduce the principal balance of your home loan.

However, there are a few more details you’ll likely want to consider before slapping all your spare cash onto your home loan balance.

Beware of fees

While putting a lump sum repayment on your home loan might seem like the most financially sound way to make use of a hefty chunk of cash, doing so can bring about fees.

Early repayment adjustments, early repayment fees, or break costs can be brought about by paying off more than your lender has allowed. That’s because they won’t be entitled to as much interest as they once expected if you repay your home loan sooner than planned. Since lenders often borrow money on the wholesale market to lend it to homeowners, they could end up in the red if a borrower pays off their home loan early.

For that reason, some lenders charge a fee if a borrower with a fixed interest rate home loan pays more than $10,000 in extra repayments per year or repays their loan in full early. Others might charge a fee if a borrower pays more than $30,000 in additional repayments.

Such fees can sometimes add up to tens of thousands of dollars and typically depend on how much money a lender loses as a result of extra repayments.

Though, that could still be less than the interest you could accumulate over the years if you don’t put down your spare cash as an extra repayment. If you’re unsure, it’s likely worth reaching out to an independent professional for advice.

Are there disadvantages to paying off a mortgage early?

Paying off debt when you can is generally a good idea. However, aside from the above-mentioned fees that could potentially be charged to pay off their home loan early, there are a few downsides to paying off a home loan early.

  • The first is perhaps the most obvious. Putting extra money aside to pay off your mortgage, without first creating an emergency fund could be setting yourself up to struggle if your financial outlook begins to look dreary.
  • Further, a mortgage is typically the lowest interest rate loan an average Aussie can grasp and, so, paying it off over the likes of, say a personal or car loan, might not be the wisest decision, depending on personal circumstances.
  • Finally, home loans can bring about certain tax benefits, particularly for property investors. Paying a home loan off early could see an end to many of those benefits.

Still, such downsides might not outweigh the financial benefits a borrower could realise by paying off their home loan early. If you’re struggling to juggle the two options, it could be worth seeking advice from an independent professional.