Lump Sum vs Extra Repayments: Which Saves More?

Key takeaways

• Timing dominates. The earlier a dollar lands, the more interest it avoids.
• $20,000 paid in year one saves roughly $63,000; the same amount paid in year ten saves about $33,000.
• Regular extra repayments still work well, and they beat a lump sum you never actually get around to making.
• On fixed loans, check the annual extra-repayment cap before paying a lump sum.

The comparison

A $600,000 loan at 6.5% over 30 years, repayment $3,792 a month, total interest about $765,000 if left alone.

The first and third rows are the same money at different times, and the gap between them is roughly $30,000.

Why does timing matter so much?

Interest compounds on the outstanding balance. A dollar removed in year one avoids interest for 29 remaining years; the same dollar in year 25 avoids five years of it.

This is also why the two strategies converge as the loan matures — late in the term there is simply less remaining interest to avoid, whichever way you pay.

The practical answer: use an offset

You rarely have to choose. Putting the lump sum in an offset account delivers the same interest saving as paying it onto the loan, while keeping the money accessible for an emergency.

Two cautions:

• On a fixed loan, extra repayments are usually capped at $10,000–$30,000 a year, and exceeding the cap can trigger a break cost.
• Ask your lender to keep the repayment unchanged after a lump sum. Some lenders automatically recalculate it downwards, which quietly cancels the time saving.

Frequently asked questions

Should I pay off the mortgage or contribute to super?

It depends on your marginal tax rate, your age and your risk tolerance. Concessional super contributions are taxed at 15%, which can beat a 6.5% guaranteed return for higher earners, but the money is locked away until preservation age. This is a question for a licensed financial adviser.

Is it better to pay off the mortgage or a personal loan first?

Almost always the higher-rate debt first. A personal loan at 12% or a credit card at 20% costs far more per dollar than a mortgage at 6.5%, so directing spare cash there produces a bigger saving.

Does a lump sum reduce my repayment or my loan term?

That depends on the lender and how you instruct them. Keeping the repayment the same shortens the term and saves the most interest. Reducing the repayment improves cash flow but gives most of the benefit back.

Related reading

• Offset Account Maths: Dollar-for-Dollar Savings Modelled
• Weekly vs Fortnightly vs Monthly Repayments: The 13th Payment Effect
• Amortisation Schedules: Reading Your First 12 Months

Sources

• Paying off your mortgage faster — ASIC Moneysmart
• Housing lending rates, statistical table F6 — Reserve Bank of Australia