How to Make Extra Repayments on Your Variable Rate Loan

Understanding Variable Rate Home Loans

When you're looking at home loan options, understanding the difference between loan types is crucial for your financial future. A variable rate home loan is one where the interest rate can change over time, typically in response to movements in the official cash rate or changes in your lender's funding costs. Unlike a fixed interest rate home loan where your repayments stay the same for a set period, variable interest rate loans offer flexibility that can work in your favour.

For homeowners in Ferntree Gully, variable home loan rates provide an opportunity to take advantage of falling interest rates while also giving you access to additional home loan features that aren't always available with fixed rate products. One of the most valuable features is the ability to make extra repayments without penalty.

The Power of Extra Repayments

Making additional payments on your home loan might seem like a small step, but the impact on your loan amount and the time it takes to achieve home ownership can be substantial. When you make extra repayments, you're reducing the principal portion of your loan, which means less interest is calculated on the remaining balance.

Here's what extra repayments can help you achieve:

• Build equity in your property more quickly
• Reduce the total interest paid over the life of your loan
• Pay off your mortgage years earlier than the original loan term
• Improve borrowing capacity for future investments
• Create a financial buffer in your offset account or redraw facility

How Variable Rates Support Extra Repayments

One of the key home loan benefits of choosing a variable rate product is the flexibility it offers. Most variable rate home loans allow you to make unlimited extra repayments without incurring fees, which isn't always the case with fixed interest rate home loan products. This flexibility means you can pay as much or as little extra as your budget allows.

When comparing home loan rates comparison across different lenders, it's worth looking at the complete home loan packages rather than just the advertised rate. Some lenders offer interest rate discounts for borrowers who maintain regular extra repayments, while others provide linked offset accounts that can achieve similar results.

Calculating the Impact of Extra Repayments

Let's consider a practical example. If you have an owner occupied home loan of $500,000 with a variable interest rate of 6.00% over 30 years, your monthly repayment would be approximately $2,997. By adding just $500 extra per month, you could:

• Reduce your loan term by approximately 7 years
• Save over $150,000 in interest charges
• Build substantial equity that improves your financial position

When calculating home loan repayments, even small additional amounts can make a significant difference. The key is consistency and starting as early as possible in your loan term.

Strategic Approaches to Extra Repayments

There are several ways to structure your extra repayments depending on your financial situation and goals:

Round Up Your Repayments
If your minimum repayment is $2,997, consider paying $3,000 or $3,500 instead. This small adjustment is often barely noticeable in your budget but compounds significantly over time.

Use Your Tax Return or Bonuses
Lump sum payments from annual bonuses, tax returns, or other windfalls can dramatically reduce your principal and save thousands in interest.

Link an Offset Account
A mortgage offset account works by reducing the balance on which interest is calculated. Your savings sit in the offset account, effectively reducing the loan amount used for interest calculations while keeping your funds accessible.

Consider a Split Loan
Some borrowers choose a split rate approach, keeping a portion on a variable rate for extra repayments while fixing another portion for rate certainty.

Understanding Your Loan Features

When you apply for a home loan, understanding the specific home loan features available is crucial. Not all variable rate products are created equal. Some important features to look for include:

• Redraw facilities that let you access extra repayments if needed
• Portable loan options that move with you if you sell and buy another property
• No monthly or annual fees for making extra repayments
• The ability to split your loan between variable and fixed components
• Options for both principal and interest or interest only repayment structures

Working with Your Mortgage Broker

For Ferntree Gully residents looking to access home loan options from banks and lenders across Australia, working with an experienced mortgage broker in Ferntree Gully can make a significant difference. A mortgage broker can help you:

• Compare rates across multiple lenders
• Identify loan products that best suit your repayment strategy
• Understand the loan to value ratio (LVR) and how extra repayments affect it
• Navigate the home loan application process efficiently
• Secure home loan pre-approval before you start property hunting

Considerations for Different Borrower Types

Whether you're seeking your first home loan or looking at refinancing your current mortgage, extra repayments remain a powerful tool. First home buyers often benefit from starting with extra repayments early, even if they're modest amounts. This builds good financial habits and accelerates equity building.

For those considering investment loans, the strategy might differ slightly. Some investors prefer interest only loans with offset accounts to maintain tax deductibility while still reducing their effective interest costs.

Managing Lenders Mortgage Insurance (LMI)

If you borrowed with a higher loan to value ratio (LVR) and paid Lenders Mortgage Insurance (LMI), making extra repayments can help you reach 80% LVR faster. Once you reach this threshold, you may be able to refinance to access lower rates or remove costly mortgage insurance from future borrowing.

When Life Changes

One concern some borrowers have about making extra repayments is what happens if they need lower repayments in the future due to changed circumstances. This is where features like redraw facilities become valuable. The extra repayments you've made typically remain accessible (subject to your lender's terms), providing a financial safety net.

A loan health check can help you assess whether your current home loan structure still aligns with your goals and circumstances.

Taking Action on Your Home Loan

The journey to financial stability and building wealth through property doesn't end when you secure your home loan. How you manage that loan over its lifetime makes an enormous difference to your financial outcome. Variable rate loans with the flexibility to make extra repayments offer you control over your financial future.

Whether you're in Ferntree Gully or surrounding areas like Boronia or The Basin, having local expertise to guide your decisions can be invaluable. At Craft Financial, we help clients understand their current home loan rates, explore refinancing opportunities, and structure their loans to achieve their goals faster.

Making extra repayments isn't about deprivation - it's about making informed choices that align with your goals. Whether that goal is to achieve home ownership outright, invest in property, or simply create a secure future for your family, the power is in your hands.

Ready to explore how variable rate loans and extra repayments could work for your situation? Call one of our team or book an appointment at a time that works for you. We'll review your circumstances, compare options across multiple lenders, and help you create a strategy that supports your financial goals.