Mortgage Payoff Calculator

How the mortgage payoff calculation works

The calculator performs the same amortisation calculation twice. It first determines the monthly principal and interest repayment that would repay the balance entered over the current remaining term. It then determines the repayment that would repay the same balance over the shorter target period. The difference between the two is the additional monthly repayment required. Both calculations use the standard amortisation formula, under which each repayment covers the interest charged for the month and applies the remainder to principal.

To measure the interest saved, the calculator simulates each schedule month by month at the rate entered, totals the interest charged under both, and reports the difference. The number of years saved is simply the current remaining term less the target period. Where the target is equal to or longer than the current term, the calculator indicates that no additional repayment is required. The results assume monthly repayments and a constant interest rate, and they exclude fees, so they are best regarded as a planning estimate and not as a payout figure from a lender.

Entering the loan balance, rate and remaining term

The loan balance should be the amount currently owing, as shown on a recent statement or in online banking, and not the amount originally borrowed. Funds held in a redraw facility have already reduced the balance. Funds held in an offset account have not, although they reduce the interest charged, which means the calculator will somewhat overstate the interest payable by a borrower with a substantial offset balance. The interest rate should be the current rate on the loan, which appears on the statement.

The current remaining term is the number of years left under the loan contract. Borrowers who have made additional repayments in the past may already be ahead of the contractual schedule, in which case the minimum repayment set by the lender may differ from the current repayment calculated here. The target repayment period is the number of years in which the borrower wishes to clear the debt. It is often chosen by reference to a life event, such as a planned retirement date or the year in which children are expected to finish school.

Worked example: repaying a 25-year home loan in 20 or 15 years

Consider an illustrative loan of $500,000 at a hypothetical rate of 6.00% with 25 years remaining. The current repayment is approximately $3,222 per month and total interest over the remaining term is approximately $466,000. Repaying the same balance in 20 years requires approximately $3,582 per month, an increase of about $361. Total interest falls to approximately $360,000, a saving of close to $107,000, and the loan ends five years sooner. The additional outlay over the 20 years is modest in comparison with the interest avoided.

A target of 15 years requires approximately $4,219 per month, which is about $998 above the current repayment, and saves approximately $207,000 in interest. A target of 10 years requires approximately $5,551 per month, about $2,330 more, and saves approximately $300,000. The relationship is not proportionate. Shortening a long term by a few years requires a relatively small increase, whereas each further year removed from an already short term requires a progressively larger one. All of these figures are hypothetical and assume that the rate remains constant throughout.

The example also shows why timing matters. Interest is charged on the outstanding balance, so additional repayments made while the balance is high avoid more interest than the same amounts paid later. A borrower who adopts the 20-year target at the outset saves close to $107,000 in this hypothetical case, whereas a borrower who waits several years before increasing repayments would need a larger monthly increase to reach the same end date and would save less interest. Repeating the calculation each year with the current balance and rate keeps the plan accurate.

How Australian lenders treat additional repayments

Research published by the Reserve Bank of Australia indicates that more than 80% of Australian home loans are written at variable rates and that these loans generally carry no penalty for early repayment. Additional repayments on a variable rate loan are typically unlimited and are often available for redraw. The Reserve Bank has also reported that mortgage holders in aggregate continue to make additional payments into offset and redraw accounts, and that the resulting buffers contribute to the resilience of households when interest rates or incomes change.

Fixed rate loans are treated differently. Lenders commonly cap additional repayments during the fixed period, either as an annual dollar limit or as a percentage of the balance, and may charge break costs where the cap is exceeded or the loan is repaid in full before the period ends. Borrowers with a split loan may direct additional repayments to the variable portion. When a loan is finally repaid, a discharge fee and a government fee for removing the mortgage from the title generally apply. The loan contract sets out the terms applicable to a particular loan.

Ways to pay off a mortgage early

The required increase shown by the calculator may be achieved in several ways. The most direct is a regular additional repayment by automatic transfer, timed to coincide with each pay day. Lump sums such as bonuses and tax refunds reduce the principal immediately. Paying half the monthly repayment each fortnight results in the equivalent of 13 monthly repayments each year. A further approach is to leave the repayment unchanged when the lender reduces the interest rate, so that the difference is applied to principal without any change to the household budget.

An offset account produces a similar effect without committing the funds. Savings held in the account reduce the balance on which interest is calculated, while the repayment remains the same, so that more of each repayment is applied to principal and the loan is repaid sooner. The interest rate is also significant. At a lower rate, a given repayment clears the debt more quickly, so refinancing to a more competitive rate while maintaining the previous repayment may shorten the loan considerably, provided that the saving exceeds the switching costs.

Each of these methods relies on the same principle: any amount paid above the interest charged for the period reduces the principal, and a lower principal reduces the interest charged in every later period. The methods may be combined, and none requires a formal change to the loan contract on a typical variable rate loan. The calculator expresses the target as a single monthly figure, which a borrower may meet through any mixture of regular additional repayments, periodic lump sums and offset savings that suits the pattern of household income.

Redraw, offset accounts and access to additional funds

Committing surplus income to a home loan reduces interest, but it may also reduce access to cash. A redraw facility permits a borrower to withdraw additional repayments previously made, although the lender may impose minimum amounts, fees or processing delays, and the terms of the contract may allow the lender to restrict or reduce the redraw available. An offset account is a separate transaction account, and funds held in it remain the property of the borrower and are generally available at call.

The distinction may also matter for tax purposes where a home is later converted to an investment property. Withdrawing funds through redraw is generally treated as new borrowing, and the purpose to which the funds are put affects whether the associated interest is deductible, whereas funds withdrawn from an offset account are not borrowed money. This is a complex area, and the Australian Taxation Office and a registered tax agent are the appropriate sources of guidance. For most owner-occupiers, the practical question is whether an adequate emergency reserve remains accessible.

Common mistakes when planning to pay off a home loan early

The first mistake is to set a target that the household budget cannot sustain. A repayment that leaves no margin for rate rises or irregular expenses is likely to be abandoned, and a moderate target that is maintained produces a better outcome than an ambitious one that lapses. The second is to disregard changes in the variable rate. In the illustrative example, the 20-year target requires approximately $3,582 per month at 6.00%, but approximately $3,876 at 7.00%. The calculation should be repeated whenever the rate changes.

The third mistake is to make additional repayments on a fixed rate loan without checking the cap, which may give rise to break costs. The fourth is to reduce a home loan while carrying debts at higher rates, such as credit cards and personal loans, which are generally more costly and are usually addressed first. The fifth is to exhaust cash reserves. Additional repayments locked in a loan without redraw, or with restricted redraw, cannot readily be recovered if income is interrupted, and a period of hardship is more difficult to manage without accessible savings.

Acting on the result: weighing early repayment against other goals

Once a target has been tested, the next step is to confirm with the lender that additional repayments are permitted without charge, and to establish how they are applied. Some lenders reduce the minimum repayment as the balance falls, and others leave it unchanged. Borrowers may then automate the additional amount and review progress annually, or whenever the rate changes. The extra repayment calculator approaches the same question from the opposite direction, showing the time and interest saved by a chosen additional repayment.

Early repayment is one of several possible uses of surplus income. Reducing a home loan provides a certain saving equal to the loan interest rate, and for an owner-occupier that saving is not taxed. Additional superannuation contributions and other investments may offer higher expected returns or tax concessions, but they involve investment risk and, in the case of superannuation, restrictions on access until retirement. The appropriate balance depends on age, income, tax position and objectives. This guide is general information only, and a licensed financial adviser is able to provide personal advice.