Paying an Extra Mortgage Payment Per Year – Does It Work?

The financial impact of extra mortgage payments

Making just one extra principal payment each year is a simple way to reduce both interest costs and loan duration. Because interest is calculated on the remaining balance, each additional payment lowers the amount on which future interest is charged. Benefits of an annual extra payment:

• Significant interest savings: Even one extra payment a year can save tens of thousands over a long-term mortgage.

• Shorter loan term: Consistent extra payments may cut 2–4 years from a 25–30 year loan.

• Faster equity growth: Reducing principal immediately boosts home ownership value.

• Budget flexibility: You choose when to make the extra payment, such as after a bonus or tax refund.

Before using this strategy, review your loan features to avoid penalties. A HeyNest broker can analyse your current mortgage and confirm the best way to apply extra payments without unexpected costs.

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Navigating prepayment penalties and loan features

Not all mortgages treat extra repayments the same. Many variable loans allow unlimited extra payments, but fixed-rate loans often restrict them or charge fees. Understanding how your lender applies extra payments is essential to avoid unnecessary costs. Key considerations:

• Prepayment limits: Fixed-rate loans commonly limit extra repayments and may charge penalties if exceeded.

• Redraw access: Ensure extra payments can be withdrawn later if needed through a redraw facility.

• Offset interaction: If you have an offset account, compare whether keeping funds there or paying principal directly delivers more benefit.

• How payments are applied: Confirm that additional payments reduce principal immediately, not just prepay future instalments.

HeyNest brokers check loan terms across many lenders and help you structure extra repayments to maximise savings without breaching limits.

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Calculating the savings from an extra annual payment

The savings from extra repayments depend on your rate, loan structure, repayment frequency and how your lender calculates interest. The impact is always positive when extra funds directly reduce principal. Important principles:

• Interest savings grow over time as principal decreases more rapidly.

• Extra payments must go to principal to affect long-term interest.

• Consistency increases benefit, whether payments are lump sums or frequent smaller additions.

• Savings vary by lender policies, interest calculation methods, and loan product flexibility.

A HeyNest broker can provide a personalised projection of time and interest saved based on your current loan, helping you determine the most effective repayment strategy without guesswork.

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Frequently asked questions

Does making an extra mortgage payment per year actually shorten the loan term?

Yes, consistently paying down the principal faster shortens the term and saves substantial interest.

Do fixed-rate mortgages allow for an extra mortgage payment per year?

Usually, but they have annual prepayment limits. Exceeding this incurs a penalty.

Is a bi-weekly payment plan the same as paying an extra mortgage payment per year?

Bi-weekly payments equal 13 monthly payments per year (one extra month's payment), achieving the same goal through consistent small increments.