Your home loan repayment is not a fixed sentence. Small, steady changes to how you repay can shorten your loan, and the right loan structure makes those changes easier to stick to.
If you live in Lakelands, in the northern part of Mandurah south of Perth, you are probably juggling a mortgage with school fees, car costs and everything else. We get that. This article covers the repayment choices that matter most, and the trade-off that comes with each one.
How Do Home Loan Repayments Work?
Your repayment covers the interest charged on your loan, and on a principal and interest loan it also reduces the amount you borrowed. In the early years, most of each payment goes to interest.
On a principal and interest loan, the balance falls over time. On an interest only loan, you pay only the interest for an agreed period, so the balance stays the same. Interest only suits some situations, but the trade-off is that you are not paying the loan down, and repayments rise when the loan switches to principal and interest.
As an illustration, take a $600,000 loan over 30 years at an illustrative rate of 6.75% p.a. The principal and interest repayment is about $3,891 a month. Interest only at the same rate is about $3,375 a month. That is roughly $516 a month less, but after five years of interest only you still owe $600,000. The loan then has 25 years left, so the repayment on the same rate jumps to about $4,145 a month. Our mortgage repayment calculator lets you test your own numbers.
Does Paying Fortnightly Help?
Paying fortnightly can reduce your loan faster, because there are 26 fortnights in a year. If you pay half your monthly amount each fortnight, you make the equivalent of 13 monthly payments instead of 12.
The extra payment goes straight against your balance, so you cut interest over time. The trade-off is cash flow. You need to be comfortable with the extra outlay each year, and some lenders handle fortnightly payments differently, so check how yours applies them.
Should You Use a Mortgage Offset Account?
An offset account is a transaction account linked to your loan, and the balance in it reduces the amount you pay interest on. A linked offset lets you keep your savings accessible while still cutting your interest.
As an example, a couple with a $600,000 loan keeps $30,000 in their offset. At the illustrative 6.75% p.a. rate, they are charged interest as if they owed $570,000. That is about $2,025 a year less interest than with no offset, and the money is still there if the car needs replacing. The outcome depends on keeping the balance there, so a half-empty offset saves less.
The main trade-off is cost. Loans with an offset can carry a higher rate or an annual package fee, depending on the lender. If your offset balance is small, that cost can outweigh the benefit. We compare this for you across lenders.
Variable Rate, Fixed Rate or Split Rate: Which Suits Your Repayments?
A variable rate moves with the lender's decisions, a fixed rate stays the same for an agreed period, and a split loan does both. Which one suits you depends on how much certainty you need and how much flexibility you want.
A variable rate usually allows extra repayments and an offset account. A fixed rate gives you repayments you can plan around, but extra repayments are often capped, and breaking the loan early can trigger break costs. A split rate puts part of the loan in each, so you can have some certainty and some flexibility.
If your fixed term is ending, our fixed rate expiry page explains what to expect, and it is worth reviewing before the lender moves you onto a different rate.
Can Refinancing Lower Your Repayments?
Refinancing can lower your repayments if another lender offers a lower rate or a better-fitting structure, but it also has costs. These can include discharge fees, application fees and the time spent changing lenders.
A lower rate only helps if the saving outweighs those costs. Asking your current lender for a rate discount is a reasonable first step. If you would like a second opinion, a loan health check compares your loan to what is available across lenders. You can also read more about refinancing.
Keeping Repayments Steady Over the Long Term
The most dependable repayment strategy is the one you can keep up for years. Paying slightly above the minimum, keeping savings in an offset and reviewing your loan every year or two will usually do more than one big move.
Consider a family who set up a variable loan with an offset and a fortnightly repayment. They add a small amount each pay and keep their emergency savings in the offset. Over time, the balance falls steadily, they have cash on hand when something goes wrong, and they review the loan with us each year. Their outcome is not dramatic, but it is steady, and it adapts when their income or family changes.
If you are thinking about your next purchase, your borrowing capacity depends on your whole financial picture, including how your current loan is structured. Our home loans page covers the options we can access.
We would rather build a relationship with you than write one loan and disappear. Call one of our team or book an appointment at a time that works for you, and we will look at your repayments together.
Frequently Asked Questions
Is it worth paying my home loan fortnightly?
Paying half your monthly repayment each fortnight adds up to one extra monthly payment a year, which reduces your balance sooner. You need to be comfortable with the extra cash outlay, and lenders can apply fortnightly payments differently.
How does an offset account reduce my interest?
The balance in your offset is deducted from your loan balance when interest is calculated. The saving depends on how much you keep in there, and some loans with an offset carry a higher rate or fee.
What is the downside of an interest only loan?
You are not paying down the amount you borrowed during the interest only period. When it ends, repayments rise because the loan is repaid over a shorter remaining term.
Should I choose a variable, fixed or split rate?
Variable rates tend to offer more flexibility, fixed rates offer certainty, and a split loan gives you some of each. The right mix depends on your budget and how much flexibility you need.
