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Try the Extra Repayment Calculator to put these concepts into practice.
Key takeaways
- ✓Variable rate loans generally allow unlimited extra repayments — fixed rate loans typically cap at $10,000/year
- ✓Extra repayments reduce your principal immediately, cutting the interest charged every subsequent month
- ✓On a AU$680k loan at 6.2%, an extra AU$500/month saves roughly AU$199,000 in interest
- ✓Redraw lets you access extra repayments if needed — offset keeps funds separate but achieves the same interest reduction
- ✓Splitting your loan (part fixed, part variable) is the most common way to balance rate certainty with repayment flexibility
Fixed vs variable: the critical difference
The most important rule before making extra repayments: check whether you're on a fixed or variable rate.
Variable rate home loans in Australia generally allow unlimited extra repayments without penalty. Any amount you pay above your minimum repayment goes directly to reducing your principal balance.
Fixed rate home loans typically restrict extra repayments to AU$10,000 per year across most lenders. Exceeding this limit can trigger a break cost (also called an economic cost or break fee), which compensates the lender for the interest they lose. Break costs can be substantial — sometimes tens of thousands of dollars — making it critical to check your specific loan terms before overpaying.
This is why many Australian borrowers opt for a split loan: fixing a portion of the loan for rate certainty, while keeping a variable portion specifically to direct extra repayments.
💡 Tip: If you're on a fixed rate and want to make extra repayments beyond the $10,000 limit, contact your lender first to get a break cost estimate. Sometimes the interest savings still justify the break fee — but run the numbers.
How extra repayments are calculated
Australian home loan interest is calculated daily and charged monthly. When you make an extra repayment, your principal balance drops immediately — meaning the very next day's interest is calculated on a lower number.
This daily compounding works powerfully in your favour. On a AU$680,000 loan at 6.2%, the daily interest charge is approximately $115. A AU$10,000 extra lump sum reduces that daily charge by about $1.70. Modest alone, but compounded over years it becomes significant.
Over a full 30-year loan term, making AU$500/month in extra repayments saves approximately AU$199,000 in interest and cuts the loan term from 30 years to around 21 years — a saving of nearly 9 years.
Redraw facility vs offset account
Both features achieve the same interest reduction — but they work differently and carry different implications.
A redraw facility holds your extra repayments inside the loan account. Your balance is lower, so interest is reduced. If you need access to those funds later, you can "redraw" them back — but some lenders charge a fee, and access is at the lender's discretion. The funds also feel more "locked away" — for disciplined savers, this is a feature, not a bug.
An offset account is a separate transaction account linked to your loan. Every dollar sitting in the account offsets your loan balance for interest calculation purposes. The money stays in your bank account — accessible at any time for everyday spending. This flexibility makes it popular with borrowers who want to reduce interest without giving up liquidity.
For most owner-occupiers who want to reduce their non-deductible mortgage debt, both options achieve similar results. For investment property owners, the offset is generally preferred because it keeps the loan balance high (maintaining maximum deductibility) while the offset funds can be redirected if needed.
Lump sum repayments: maximising annual opportunities
Beyond regular monthly extra repayments, consider making lump sum contributions when funds become available — tax refunds, bonuses, inheritance, or savings windfalls.
On a variable rate loan, there's no limit to when or how much you can pay. On a fixed loan, keep track of your annual AU$10,000 allowance. For many borrowers, directing the annual tax refund to the mortgage (if on a variable rate) is one of the simplest and most effective financial habits to adopt.
Lump sums made early in the loan term have the greatest impact because the interest savings compound over more remaining years. A AU$20,000 lump sum in year 2 of a 30-year loan saves far more than the same AU$20,000 in year 20.
💡 Tip: Set up a direct debit for your regular extra repayment amount on the same day as your salary lands. Automating the extra repayment removes the temptation to spend it and builds the habit without requiring ongoing willpower.
Frequently Asked Questions
Calculators mentioned in this guide
Disclaimer: Calculations are estimates for general guidance only and do not constitute financial advice. Home loan rates, stamp duty, and LMI costs vary by state, lender, and borrower circumstances. Consult a licensed mortgage broker or financial adviser before making property decisions.