Find out how much time and interest you can save by making an additional repayment to your home loan using Savvy’s lump sum repayment calculator
‘When life gives you lemons, make lemonade.’ This saying definitely applies to paying off your home loan, so if you’re in the position of being able to make a substantial repayment off your loan, you should seize the opportunity. Savvy’s lump sum repayment calculator helps you calculate your savings when you pay a chunk off your loan.
First, enter your loan details into the lump sum repayment calculator. Click on the green arrow button to change your repayment frequency from monthly to fortnightly or weekly. Next, enter in the lump sum you wish to pay off, and the point in time when you’re looking to make this repayment.
Click anywhere on the page to see your results. The chart will show you by how much the extra loan repayment has reduced your loan term, and the results will also show you how much interest you’ve saved by making the repayment.
It’s better to make frequent, smaller extra loan repayments if you’re able to, simply because home loan interest is calculated daily. If you make a lump sum repayment once a year, for the remaining 364 days of that year, you’ll be paying interest on your loan as normal. Contributing an extra repayment each month, for instance, gives your interest 12 chances to reduce further, compared to the one which comes from a single lump sum. As such, more frequent additional repayments will reduce the interest you pay most effectively.
How is home loan interest calculated?
Multiply your loan balance by your interest rate (as a decimal) and then divide this sum by 365 days. This will give you your daily interest.
Multiply this number by 30 (if there are 30 days in that month) to get your monthly interest amount.
For example, if your loan balance is $250,000, and your interest rate is 2.3% p.a., the calculation for daily interest would be:
(250,000 x 0.023) ÷ 365 = 15.75
This means you are paying $15.75 per day interest on your $250,000 loan.
However, rather than do calculations manually, it’s far easier to use Savvy’s mortgage repayment calculator to instantly do all the hard calculations for you.
Yes, you can – if you find yourself in the position of being able to make regular additional repayments on your home loan and want a more permanent solution to pay off your loan faster, it may be time to refinance to a loan with a shorter term. This will increase your loan repayments but mean you pay off your mortgage faster. Use the mortgage repayment calculator to play around with figures so you can see for yourself how making larger repayments for a shorter period can save you thousands in interest.
For example, on a $400,000 loan taken out for 30 years with a 2.5% interest rate, you’ll pay $168,760 in interest with fortnightly repayments of $729. If you took out a 25-year mortgage instead, you’ll pay $827 in repayments but the total interest paid will only be $138,123, a saving of $30,637. This is the difference a lump sum can potentially make to your home loan repayment experience.
Make sure that if you do refinance, you’re able to refinance to a loan with a lower interest rate and that you’re not penalised by having to pay expensive early exit fees (also known as break fees) on a fixed term loan. Savvy is a great place to compare home loans and provides you with accurate and up-to-date comparison information, so you can make the best choice of loan to fit your individual financial needs.
One option is to pay the lump sum off your variable rate loan, which will save you interest by reducing the principal amount you owe. The disadvantage of this option is that you won’t have access to any of your lump sum in case of emergency.