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

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 pay a large sum of money towards the principal, it’s known as mortgage recasting or amortisation. This reduces the overall mortgage balance. Subsequently, you will be able to make smaller payments every month until you pay off the entire mortgage. Once the mortgage is amortised, there won’t be any change to the loan term or the interest rate.

If the lender is not ready to offer mortgage recasting, then making a lump sum payment on a home loan can reduce the loan balance to a certain extent. But, in such a scenario, you would have to make monthly repayments just as before. Without any amortisation, you will still be able to clear the debt before the loan term ends.

To recast your mortgage, you need to contact the lender and check whether you are eligible. You may also want to speak with a mortgage broker and check if such a lump sum payment is allowed on your home loan. 

Before paying, check your financial status to determine whether or not you have a surplus available for paying a lump sum of the mortgage. You will need to submit a request to the lender confirming that you’re comfortable with recasting the mortgage. 

While the entire process may take some time, you should continue making monthly repayments during that period. Once you receive a confirmation regarding the amortisation, you could start making repayments equivalent to the new amount.

Depending on your financial situation and overall expenses, you can decide whether you should pay a lump sum amount. But, in case you’re not comfortable doing so, 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 to reduce the amount of interest you would otherwise have to pay. Before deciding on anything, however, you should ensure that you have sufficient funds to pay off other debts. It is also a good idea to keep aside some money for emergencies and unexpected expenses. 

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.