One such strategy, if it suits your financial situation, is making additional voluntary mortgage payments in addition to your agreed upon schedule. In this article, we’ll delve into the advantages and disadvantages of making extra mortgage payments so you can make an informed decision.

Reducing the Interest Owed
A mortgage involves paying off two main components, the principal balance borrowed, plus the cost of borrowing in the form of interest. When you make extra mortgage payments, you reduce the principal balance of your loan faster than the standard repayment schedule. This means you owe less money on which the lender can charge interest. Even a small additional monthly payment can make a significant difference in the total interest paid over the life of the loan.

Shortening the Loan Term
The home loan remains active until all of the principal amount is repaid. As the extra mortgage repayments chip away at the principal balance, you’ll be able to accelerate the repayment process and shorten the loan duration. Through this, the debt-free dream can be achieved with more financial security sooner. Alternatively, the extra funds saved could instead be used paying off a home loan or for other means such as an investment property or retirement savings.

Building Equity Faster
As the principal balance owed on your mortgage decreases, the equity in your property grows. Equity is a valuable asset that builds up through a combination of capital growth and paying off the principal amount. Making extra mortgage repayments accelerates the growth of equity and could contribute to purchasing another property or help you refinance your home loan as your loan-to-value ratio decreases.

While making extra mortgage payments offers multiple benefits, it’s important to consider potential drawbacks before committing to this financial strategy:

Lost Opportunity Cost/Reduced Liquidity
If you’re thinking of making extra mortgage repayments, it may be worthwhile to check if your loan has a redraw facility, and if there are any associated costs for using this loan feature. Without it, extra repayments cannot be drawn out in case of an emergency or another investment opportunity that could potentially generate better returns over the long term. Overall, making extra mortgage repayments may give you less flexibility with your cash when unforeseen circumstances arise.

Early Payment Fees
Some mortgage agreements include prepayment penalties or fees for paying off the loan early. Check your mortgage contract to understand any potential penalties, as they can offset some of the financial benefits of extra payments.

Consider an Offset Account
As we’ve already discussed, making extra mortgage repayments reduces your principal amount at a faster rate, thus reducing the duration of your loan. On the same note, a mortgage offset account yields very similar results. An offset account is a bank account that is linked to your mortgage. Any money you have in the account, reduces the interest payable on the principal amount. For example, if you have a $500,000 mortgage and $30,000 in an offset account, you only pay interest on $470,000. This can save you a significant amount of money by reducing your interest over the life of your loan, with the added benefit of being able to transfer money in and out of the account freely. Offset accounts offer much more flexibility and liquidity for your cash as opposed to making extra mortgage repayments. Borrowers need to check with their lender if there is an extra fee attached to the feature, but with WLTH, it comes included at no extra fee.

Potential tax benefits
Making extra mortgage repayments and having an offset account each have their own potential tax benefits, especially when it comes to investment into further property. Talk to your accountant or finance professional to learn more.

Whether through extra mortgage repayments or utilisation of your offset account, reducing the interest owed on the principal balance is a great way to be debt-free sooner. Don’t forget however that these are not the only ways to effectively manage your home loan for a positive result. Speak to a lending professional or mortgage broker as they may be able to offer you other solutions to meet your financial goals.

Any advice provided is general in nature and should be considered in line with your financial situation, needs and objectives.