How Extra Repayments Can Cut Years Off Your Home Loan
24 May 2026
Why Extra Repayments Work So Powerfully Early On
In the early years of a principal and interest home loan, the majority of each repayment goes toward interest rather than reducing the loan balance. On a $600,000 loan at 6.2%, the minimum monthly repayment is around $3,660. In the first month, roughly $3,100 of that goes to interest and only $560 reduces the principal. The sooner you reduce the outstanding balance, the less interest accrues on the remaining debt — and that effect snowballs across the entire remaining term.
This is why $500 extra per month in the first five years produces a much larger time saving than $500 extra per month starting in year 15. The interest clock runs on the current balance. Lower the balance early, and you reduce the base on which all future interest is calculated.
Based on $600,000 loan at 6.2% over 30 years. Figures are approximate and assume a variable rate held constant throughout.
Redraw vs Offset: Where Do Extra Repayments Go?
On a standard variable loan, extra repayments typically reduce your loan balance directly and sit available as a redraw. The money reduces the principal immediately, which lowers interest accrual from that point forward. If you need the funds later, most lenders allow you to redraw them — though some charge a fee and approval is not always guaranteed.
An offset account works differently. Instead of reducing the loan balance directly, the money sits in a linked transaction account. The lender calculates interest on the loan balance minus the offset balance. If you have $50,000 in an offset account against a $500,000 loan, you pay interest on $450,000. The offset balance stays fully accessible — it behaves like a regular bank account.
For borrowers who want flexibility and easy access to their savings, an offset account is often more practical than making extra repayments into the loan itself. For those who want the discipline of locking funds away, direct extra repayments can provide a useful psychological commitment. Both strategies reduce the interest you pay — the key difference is how accessible the money remains.
Fortnightly vs Monthly Repayments
Switching from monthly to fortnightly repayments is a simple structural change that accelerates the loan without requiring any additional cash. There are 26 fortnights in a year but only 12 months. Paying half your monthly repayment fortnightly results in 13 full monthly repayments worth of payments per year rather than 12 — one extra month's repayment annually, applied directly to principal.
Monthly equivalent: $3,660 × 12 = $43,920 paid annually.
Difference: $3,660 per year in additional principal repayments, with no change to weekly cash flow perception for most borrowers.
On a $600,000 loan at 6.2% over 30 years, fortnightly repayments alone can cut the loan term by around 4 years and save over $100,000 in interest — with no increase in the per-payment amount beyond the mathematical split.
Lump Sum Repayments and When They Hit Hardest
Tax refunds, bonuses, inheritance, and asset sales are common sources of lump sum repayments. A single $20,000 lump sum payment on a $600,000 loan at 6.2% in the first year reduces the loan term by approximately 1 year and 8 months and saves around $67,000 in interest over the life of the loan. The same $20,000 applied in year 20 saves a fraction of that — because there are fewer years of compounding ahead.
Some fixed-rate loans cap the amount of extra repayments permitted each year — often $10,000 to $20,000 — without triggering break costs. Borrowers on fixed rates who want to make large additional payments should check their loan contract before doing so, as exceeding the cap can result in fees that offset the interest saving.
Does It Always Make Sense to Pay Down the Loan Faster?
For owner-occupier borrowers, extra repayments on a home loan are effectively a guaranteed after-tax return equal to the loan interest rate. If your loan rate is 6.2%, every dollar you put toward the loan saves you 6.2% in interest — guaranteed, with no investment risk. That is a competitive return by any measure in the current environment.
For investment property loans where the interest is tax-deductible, the calculation changes. Reducing a deductible debt lowers your available tax deduction, which changes the effective cost of the interest. In that context, some borrowers prefer to direct surplus cash into an offset account on their owner-occupier loan first — preserving deductible debt while still reducing interest — though this is a decision that warrants a conversation with an accountant based on your specific tax position.
Key Takeaways
- Extra repayments work hardest early in the loan term, when the outstanding balance is highest and interest accrual is greatest.
- $500 extra per month on a $600,000 loan at 6.2% saves approximately $198,000 in interest and cuts the term by more than 8 years.
- Switching to fortnightly repayments adds one extra monthly payment per year with no change to the per-payment amount, cutting years off the loan at no extra cost.
- Redraw and offset accounts both reduce interest paid but work differently — redraw reduces the loan balance directly, offset sits as accessible savings.
- Fixed-rate loans often cap annual extra repayments at $10,000–$20,000. Check your contract before making large lump sum payments.
- On investment loans with deductible interest, the trade-off between paying down debt and preserving tax deductions is worth reviewing with an accountant.
