How does a lump sum payment on a home loan help you?

If you’ve purchased a house, you’ve probably taken a home loan. Naturally, you’ll want to pay off the loan as soon as possible and save on interest costs. If your financial situation is comfortable, you may consider paying a lump sum to reduce the costs associated with your home loan. But do you know what difference paying a lump sum amount will make?

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A lump sum payment on a home loan is a one-time extra payment made towards the loan principal, in addition to your regular monthly repayments. This reduces the outstanding loan balance, which in turn can lower the total interest you pay over the life of the loan and potentially shorten your loan term.

If you want to reduce the amount of debt you owe before the full tenure of your mortgage, you may consider paying a lump sum into your home loan.

When you make a lump sum payment towards your home loan, it works unlike your regular payments that cover both interest and principal. A lump sum payment directly reduces your loan balance. This also affects the interest you’ll pay over time, as your interest is now calculated on the remaining balance. Reducing your principal amount can also help you shorten the length of your loan, provided you continue making timely repayments on your mortgage.

If you receive a lump sum payment — whether from a tax refund, annual bonus, or inheritance — you may wonder whether to save it or use it to reduce your debt. Unless you have other high-interest debts that need to be repaid first, making a lump sum payment on your home loan could help you pay off your mortgage sooner and save on interest costs.

This strategy can be particularly beneficial if you're nearing retirement or aiming to become debt-free as quickly as possible. However, before committing to a lump sum payment, it's important to assess your financial situation to ensure you have enough surplus funds. If you have other debt obligations, make sure that prioritising your mortgage doesn’t put you in financial strain.

Your decision should be based on your overall financial health and expenses. In case you’re not comfortable making a large one-time payment, then you could switch to extra repayments. Instead of monthly repayments, you can go for weekly or fortnightly repayments and request the lender to set the repayment cycle accordingly.

Making repayments more frequently can help reduce the amount of interest you pay over the life of your loan. However, whether you choose to make a large lump sum payment or increase your regular repayments, it's important to check with your lender for any additional fees or charges that may apply.

Weigh the costs and benefits carefully before deciding on the right strategy for you. It’s also essential to ensure you have sufficient funds to cover other financial obligations, rather than focusing solely on repaying your mortgage. Additionally, keeping aside some money for emergencies and unexpected expenses can help protect you from financial strain.

If you prefer making extra repayments regularly to a lump sum payment on a home loan, then RateCity’s home loan calculator can give you a fair idea of how much money you can save. You will also be able to figure out the pace at which you can afford to pay off your mortgage.