How to Use Extra Repayments on a Variable Rate Loan

Paying extra on your variable rate loan reduces the interest you pay over the life of the loan.

For first home buyers in Sydney's Inner West, where median property prices sit well above the city average in suburbs like Stanmore and Ashfield, even modest additional repayments can make a meaningful difference. The question most buyers ask after they've settled is whether they should make extra repayments at all, and if they do, whether they can access that money later.

How Extra Repayments Reduce Interest

Extra repayments reduce your loan balance, which reduces the amount of interest you're charged each month. If you're paying $2,500 per month on a variable rate loan and add $200 extra, that $200 comes straight off the principal. The following month, interest is calculated on a slightly lower balance.

Consider a buyer who purchases a two-bedroom terrace in Petersham with a 10% deposit and a loan amount of $850,000 at a variable interest rate. If they pay an additional $300 per month, that amount reduces the principal immediately. Over several years, the compounding effect becomes noticeable, not because of any dramatic saving in a single month, but because the balance decreases steadily and interest is recalculated on that lower figure each time.

This approach works particularly well on a variable interest rate because there are typically no restrictions on how much extra you can pay. Unlike a fixed interest rate, where additional payments are often capped or penalised, variable loans usually allow unlimited extra repayments without penalty.

Redraw and Offset Accounts

The two main ways to access extra repayments are through redraw facilities and offset accounts. A redraw facility allows you to withdraw money you've paid above the minimum. An offset account sits alongside your loan and reduces the interest charged based on the balance in that account.

Redraw facilities are common on variable loans and usually have no monthly account fee. When you make extra repayments, that money reduces your loan balance, and you can apply to redraw it if needed. Some lenders process redraws instantly online, others take a few business days, and some charge a small fee per withdrawal. It's worth checking the terms before you settle.

Offset accounts function differently. The money sits in a separate transaction account, and the lender calculates interest as if that amount has been deducted from your loan balance. If you have $20,000 in your offset account and a loan balance of $850,000, you're only charged interest on $830,000. The benefit is that your money remains accessible at all times without needing to request a redraw.

In our experience, buyers who receive irregular income or work in industries with variable hours prefer offset accounts because the funds remain liquid. Those with steady income who want to pay down the loan faster often use redraw facilities, particularly if the lender doesn't charge for the feature.

Low Deposit Options and Extra Repayments

If you've entered the market with a 5% deposit through the First Home Loan Deposit Scheme or a 10% deposit with Lenders Mortgage Insurance, paying extra on your loan can be a way to build equity faster. This becomes relevant if you're planning to refinance or if you want to remove LMI from a future loan.

As an example, a buyer in Croydon Park purchases a unit with a 5% deposit under a government scheme. Their loan amount is $760,000, and they're paying LMI on a separate loan amount. Over the first two years, they pay an extra $250 per month. That $6,000 in additional repayments, combined with any property value growth, brings them closer to the 20% equity threshold. When they refinance, they may avoid LMI on the new loan, which can represent several thousand dollars in savings.

It's not always necessary to refinance, but having the option matters. Paying extra on a variable rate loan with a redraw or offset account gives you flexibility without locking you into a structure that penalises early repayment.

Budgeting for Extra Repayments

The amount you can afford to pay extra depends on your household budget after you've accounted for rates, strata, insurance, and maintenance. For first home buyers in the Inner West, where many properties are older terraces or walk-up units, maintenance costs can be unpredictable.

A sensible approach is to pay a fixed extra amount each month rather than fluctuating based on what's left over. If $200 per month is sustainable, set up an automatic transfer so the payment happens without needing to think about it. If your income increases or your expenses drop, you can always increase the amount later.

Some buyers prefer to keep extra funds in an offset account rather than paying them directly onto the loan, particularly in the first year or two after settlement. This approach still reduces interest while keeping the money accessible for unexpected costs. Once you're confident in your budget, you can decide whether to leave it in the offset or pay it directly onto the loan balance.

When Not to Pay Extra

There are situations where paying extra on your home loan isn't the most useful option. If you have personal debt at a higher interest rate, such as a car loan or credit card, paying that down first makes more sense. If you're saving for a specific goal in the next year or two, keeping that money accessible in a high-interest savings account might be more appropriate.

Another consideration is your employment situation. If your income is uncertain or you're planning a career change, holding onto cash rather than paying it onto the loan gives you a buffer. Redraw facilities are generally reliable, but access to your money depends on the lender's terms, and in rare cases, redraws can be restricted if the loan is in arrears or under review.

The decision comes down to what gives you confidence. For some buyers, seeing the loan balance decrease is motivating. For others, having accessible cash provides security.

When you're ready to discuss your borrowing capacity or work through the numbers on a variable rate loan with extra repayments, call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions