Extra repayments and how they impact your home loan

Published 29 May 2026 · Updated 29 May 2026 · 5 min read · By Shane Heness, mortgage broker

This is the highest-return financial decision available to most households, and it is also the one where the mechanics are most often misunderstood.

What extra repayments actually do

Interest is charged on the outstanding balance, calculated daily. Reduce the balance and you reduce the interest charged from that day until the end of the loan. Because the saving compounds, timing matters more than size.

Illustrative, assuming a constant 6.0 per cent rate and monthly repayments from the start of the loan. Actual results depend on rate movements and when the extra repayments start. Not a quote.

Timing beats size

The same total of extra repayments produces very different outcomes depending on when it is made.

Illustrative on a $700,000 loan at 6.0 per cent. The same $36,000 produces roughly five times the saving when it goes in early.

That is the argument for starting now rather than starting when it feels comfortable. It is also the argument against waiting until the loan feels small enough to attack.

Offset versus redraw: the decision that matters most

Both reduce the interest you pay. They behave very differently in every other respect.

The tax trap

This is the part that catches people, and it is worth understanding before you choose.

The deductibility of interest depends on what the borrowed money was used for. If you pay $80,000 into your home loan and later redraw it to buy a car, that $80,000 is new borrowing for a private purpose. If you subsequently move out and rent the property, the interest on that $80,000 is not deductible, even though it sits inside a loan secured against an investment property. Untangling it afterwards is messy and sometimes impossible.

An offset account avoids the problem entirely, because the loan balance never changes. Money goes into a separate account and comes out again, and the loan is untouched.

The practical rule. If there is any chance you will keep this property and rent it out later, use an offset. The package fee is cheap insurance against a deductibility problem that can cost far more. Confirm the treatment with your accountant, because this is tax advice territory and we do not give it.

When redraw is fine

If the property will always be your home and you will never rent it, redraw is simpler and usually free. On a small balance, the offset package fee can exceed the benefit. Run the numbers rather than assuming offset is always right.

Fixed rate caps

Most fixed loans cap extra repayments at $10,000 to $30,000 a year, with break costs beyond that. That is not a small detail. A household that fixes the full balance and then receives a bonus, an inheritance or a redundancy payment finds the money cannot go where it should.

The usual answer is a split. Fix the portion you will not touch and leave variable the amount you expect to pay down or offset. Our post on switching from variable to fixed works through how to size the split.

Three things that make extra repayments work better

1. Pay fortnightly, not monthly

Set your repayment to exactly half the monthly amount and pay it fortnightly. There are 26 fortnights in a year, which is 13 monthly equivalents rather than 12. On a $700,000 loan at 6 per cent that alone takes roughly four years off the term without any change to your budget beyond the timing.

2. Do not reduce the repayment when rates fall

When a rate cut arrives, most lenders drop your minimum repayment automatically. Keeping the repayment where it was turns the cut into a permanent extra repayment. It is the least painful extra repayment available, because you were already paying it.

3. Direct the whole of irregular income

Tax refunds, bonuses and any windfall are the highest-value extra repayments because they are lump sums early in the term. A $10,000 tax refund applied in year two of a 30 year loan saves around $28,000 over the life of the loan at 6 per cent.

When not to make extra repayments

Three situations where the money is better used elsewhere.

• You carry higher interest debt. A credit card at 19.9 per cent or a personal loan at 11 per cent should be cleared first. The mortgage is your cheapest debt, so it should be the last one you attack.
• You have no emergency buffer. Three to six months of expenses accessible in an offset is worth more than a slightly smaller loan balance, particularly where redraw can be restricted by the lender at exactly the moment you need it.
• You are about to buy again. Paying down an owner occupied loan and later redrawing to fund an investment deposit creates the deductibility problem described above. Offset instead, and keep the structure clean.

Check the structure before you start

Whether an offset is available, whether extra repayments are capped, whether redraw is free or fee-charged, and whether the loan term resets if you refinance are all decisions made at application and expensive to change later.

Our refinancing page covers the structure changes worth making and the annual review we run for clients, or book a free call and we will look at whether your current loan is set up to reward the extra repayments you are making.

Frequently asked questions

Written by Shane Heness

Owner and mortgage broker at LoanBuddy, Parramatta NSW. Eight years as a mortgage broker and a property investor since 2015. Credit Representative #528658 under Australian Credit Licence #389328.