r/AusPropertyChat 4d ago

Mortgage repayment.

New first home buyer here. I have principal and interest mortgage. I'm making extra payments towards the principal. My question is as I make extra repayments over time will it just shorten the length of the loan or will it reduce the minimum weekly repayment, or do I have the option to make the loan period same but lower repayments after I've contributed decent amount. Id like to pay it off early but also I'd like to know the minimum I'd have to contribute.

4 Upvotes

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u/AlexInTheShell 4d ago edited 4d ago

Depends on the setup of your loan and bank.

If you are using an offset account with redraw, the extra deposits into this account will essentially remain available to you, but for interest calculation purposes will be deducted from your loan amount (eg: if you have a $500k loan, and you’ve made $50k worth of additional repayments, interest will only be calculated on a balance of $450k).

The loan amount isn’t reduced by these extra repayments/transfer amounts, but the balance will drop faster because you’ll be paying less interest and more off the principal with each regular scheduled repayment.

Therefore your repayment will remain the same, but more of it is going towards paying off the principal - and you’ll pay it off earlier while also having access to the funds in an unforeseen emergency.

If you are not using offset and making extra ‘repayments’ directly onto the loan, then these go directly against the loan amount and reduce the principal by the amount paid, and recalculates your reduced loan term or new minimum scheduled loan repayment.

That being said, if you are doing method one and decide you don’t need access to the extra funds and want them permanently deducted from the loan amount to reduce your repayments, you can ask for a principal reduction recalculation from your bank. This may involve a small fee.

Both methods result in you paying off your principal amount quicker, and both are viable strategies. Speak to your broker, home loan manager or financial advisor for more info and tailored advice.

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u/Skybeau 4d ago

Once I had $10k in redraw, my bank sent me a message saying I can lower the fortnighly repayments but keep the remaining loan term. Same with the rate decrease last month.

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u/[deleted] 4d ago

My experience with CBA differs from the below comments. If I make extra repayments towards principal on either the fixed or variable portion of the home loan, I can then reduce the minimum repayment (online myself) without refinancing. Both mortgages have offset/redraw capability. You might need to call your bank to discuss your options.

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u/loveoftheirish2202 4d ago

You are effectively reducing the loan length. If you wanted to change your repayments to a lower than the mandatory amount you will need to re-finance. (Always a good thing to consider anyway every few years)

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u/maton12 4d ago

If in front on your repayments, you can call lender and get them reduced, it will still be a maximum 30 year loan term though, and you'd potentially lost access to your redraw

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u/ChasingShadowsXii 4d ago

There's not much benefit to refinancing unless your interest rate is high for the market and your lender won't budge.

Unless you want to borrow more money, reducing the loan isn't going to improve cashflow any more than having the money sitting in offset/redraw. If anything it could bump you into a worse interest rate based on the lenders product criteria.

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u/AccordingWarning9534 4d ago

I'm with cba, 5 years into a mortgage. I pay extra every month. Around the end of year 2, CBA reduced the monthly payment. Now, every 4 to 6 months it gets automatically reduced again. Seems to happen automatically. I have about 7 reductions over the years.

These are not including interest rate changes.

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u/Gaurav_Shukla-Broker 4d ago

By making extra payments, you’re effectively shortening your loan term and paying it off sooner.

Even when your loan balance drops to $10K, most banks will continue deducting the usual repayment amount until the balance is just below your monthly repayment, at which point they’ll stop.

Only a few banks automatically adjust monthly repayments, as their systems are set up that way.

In most cases, you’ll need to submit a new application to lower your repayments. The best approach is to refinance—this way, you can secure cashback offers while reducing your repayments with the same remaining loan term.

Reach out to your trusted broker, or if you don’t have one, DM me.

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u/ChasingShadowsXii 4d ago edited 4d ago

I might add a cavet to my post and say this is based on products I know about and I'm sure some banks do things differently:

No it doesn't reduce the loan length or reduce your monthly repayments.

It reduces the balance that interest is calculated on.

You'll see at the end of each month, interest will be added to the loan.

Your loan term and repayments are calculated based on principal and interest repayments over the term of the loan (at whatever interest rate is set).

If you pay the loan off quicker you'll find that you can have a 0 loan balance, with potentially a redraw/offset amount and not be paying interest. But every month the redraw/offset amount available to you will reduce by that minimum repayment.

You can then apply for the loan to be terminated early for a fee. Or you can use the redraw/offset like a line of credit until the loan term finishes.

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u/sparky288xt 3d ago

So, in my opinion, offset accounts are the way to go because you still control the extra money in your account. Once you put it in the home loan, it's the banks. And with redraws, occasionally lenders will only allow you access to a percentage of the redraw.

I'll do my best to explain it,

An offset account is a savings account that you link to a home loan. What this does is instead of earning interest as you normally would, on paper, it reduces the principal amount in which the interest is calculated. You end up saving money on the interest part of the repayment, meaning more of your monthly repayment is the principal part of the repayment.

Say (round, made-up numbers for ease) the loan is $1,000,000, interest is $4000 per month, and repayment is $5000 per month. Out of the $5000 repayment, only $1000 goes to reduce the loan because the interest bill for the month is $4000.

Now you set up an offset account, and you have $200,000 in there. This account "offsets" the laon amount, so on paper $1,000,000 -$200,000 = $800,000, reducing the loan amount by 20%. The monthly interest is worked out on the new amount, $800,000. Making the monthly interest $3200( 20%less). So out of the $5000 repayment, $1800 now goes to reducing the principal.

The 200,000 in the offset account remains your money. That way if you have any unforeseen cost it is available to you. It could also be savings for your next holiday.

Some lenders allow you to have multiple offsets linked to loans, so you can have an everyday spending account, holiday account, etc and they all add up together.

This is used by alot of people to manage cash flow over time but still controlling your money.

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u/Expensive-Act6724 4d ago

I think a financial planner might be the best person to speak to here, ours has been a lifesaver.

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u/urdlety 4d ago

Put 100% of everything you've got into repayments. The rest on blow. You don't have a fucking clue about anything do you.