Can I pay off my home loan early?

Variable loans: extra repayments are usually free

Most variable rate loans let you pay more than the minimum, in any amount and at any time, without a fee. Every extra dollar reduces the balance that interest is charged on, so the savings build on themselves over the life of the loan. A few products do limit extra repayments, so check your loan contract or ask your lender before you start.

Early termination fees were largely banned for home loans taken out from 1 July 2011, so paying out a variable loan early does not usually attract a penalty. You may still pay a discharge fee to close the loan and a government fee to remove the mortgage from your title.

Fixed loans: watch the limits and break costs

Fixed rate loans usually allow extra repayments only up to an annual limit during the fixed term. Paying more than that, refinancing or paying the loan out early can trigger break costs, which cover the lender's loss when a fixed rate is broken. Break costs were not part of the 2011 ban and are still allowed.

If paying the loan down faster is a priority, a split loan can help. Fix part of the balance and leave the rest variable, then direct your extra repayments to the variable portion. Check the fixed rate limit before making a lump sum payment, and get a written break cost estimate if you plan to pay out the loan during the fixed term.

What a little extra can do

Here is an illustration using a typical variable rate on a $500,000, 30-year principal and interest loan. Illustrative only, not a quote or an offer of credit. The minimum monthly repayment is about $2,998. Adding $200 a month pays the loan off roughly four and a half years early and saves around $103,000 in interest. Adding $500 a month clears it about nine years early and saves around $199,000. These figures are a guide only and assume the rate never changes.

Paying half your monthly repayment every fortnight has a similar effect. There are 26 fortnights in a year, so you end up making the equivalent of 13 monthly repayments instead of 12. On the same example that takes about five and a half years off the loan. Our extra repayments calculator lets you test your own numbers.

Offset accounts and getting money back out

An offset account is a transaction account linked to your loan. Its balance is subtracted from the loan before interest is calculated, so $30,000 sitting in offset against a $500,000 loan means you pay interest on $470,000. The money stays available to you, which suits people who want to cut interest but keep a safety buffer.

If you make extra repayments straight into the loan instead, you may be able to access them later through a redraw facility, but lenders can limit how much you take out or charge a fee. On investment loans, how you use these features can have tax consequences, so speak with your accountant before setting the loan up.

Should you pay the loan off early?

For most owner-occupiers, paying down the home loan is a low-risk use of spare cash. Every dollar of interest you avoid on your own home is a real saving. It is still worth weighing against other priorities. High-interest debts such as credit cards are usually better cleared first, and an emergency buffer matters.

Extra super contributions may suit some people, but that depends on your age, tax position and goals, so talk to a licensed financial adviser. If you plan to pay the loan out completely, through a sale, an inheritance or a refinance, ask your lender about its discharge process early and allow time for the paperwork to be prepared.

Frequently asked questions

You might also find useful