How Small Regular Repayments Can Shorten Your Mortgage Term
Turning Compound Interest to Your Advantage
Most people have heard about compound interest when it comes to growing investments. The idea is simple: you earn “interest on interest” and over time your money snowballs. But when you have a mortgage compound interest exerts its power in the opposite direction. On a home loan interest is typically calculated daily and added to your loan balance, so you end up paying interest on both the money you originally borrowed and the interest that has already accrued unless you’re actively reducing your debt.
While this can be costly if you simply pay the minimum each month it’s also an opportunity. When you make extra repayments, no matter how small, you’re harnessing the mechanics of compound interest to work for you rather than against you.
Why Small Repayments Really Matter
Home loans are often the largest financial commitment most people make. Over decades the compounding effect of interest can be enormous. For example, if you borrow $600,000 at 6.5% over 30 years you could end up paying nearly $735,000 in interest alone. That’s more than the price of your house. This happens because, with each day that passes, the interest is calculated on your remaining loan balance which includes any unpaid interest from before.
But every dollar you put in above your regular mortgage repayment immediately starts to reduce your loan’s principal. That means from the very next day, less interest is charged because the balance that the bank uses to calculate your daily interest is smaller. Over time, not only are you shortening your loan term you’re also dramatically reducing the total amount of interest you pay.
A Real-World Example: Big Savings With Modest Extras
Let’s bring it to life with an example. Imagine that same $600,000 mortgage with a $3,800 monthly repayment due over 30 years. If you paid just an extra $100 every fortnight (only $50 a week) you could finish your mortgage more than four years early and save over $130,000 in interest. That’s the upside of compound interest working in reverse: your regular extra payments today keep “echoing” forward, saving you more and more as time goes on.
If you receive windfalls like tax refunds or bonuses then using them for occasional lump sum repayments alongside your regular extra contributions acts just like fertiliser for your mortgage garden. It isn’t so much the size of the extra deposit, it’s the consistency and timing that matters most.
The Earlier, The Better
Starting with additional repayments early in your mortgage (whether big or small) gives compound interest more time to work in your favour. Early extra payments cut more interest because they lower your balance sooner. There’s less to be charged interest each day forwards. Even delaying by a few years can noticeably diminish how much you stand to save.
This doesn’t mean you have to overhaul your lifestyle to find hundreds of extra dollars every month. Often, rounding your repayment up to the nearest $50 or $100, setting aside a small portion of an annual pay rise or automatically transferring a modest amount every payday can set you up for significant savings.
Flexible Mortgage Features to Boost Your Progress
Some home loans offer handy features like revolving credit, offset accounts or redraw facilities. These allow you to make extra repayments or deposit lump sums while still letting you access the funds if you later need them for emergencies or unexpected expenses. By combining flexibility with discipline you can keep your money working hard without feeling locked in.
Discussing your loan’s structure with your mortgage adviser can help ensure you’re in a position to make extra repayments easily and take full advantage of these features. The right structure will support your goal of chipping away at your mortgage as efficiently as possible.
Emotional Benefits: More Than Just the Numbers
Paying off your mortgage faster isn’t just about the financial side. Watching your home loan balance shrink more quickly than expected can be deeply motivating. It reduces financial stress, helps you feel more in control and brings the freedom of owning your home outright closer to reality. It also gives you a stronger buffer against rising interest rates or unforeseen changes in your circumstances.
Putting Compound Interest on Your Side
Compound interest will always be at play either growing your debt in the background or, with extra repayments, helping you get ahead. By consistently making small additional repayments you’ll save thousands — if not hundreds of thousands — in interest, shorten the life of your loan and set yourself up for greater financial freedom. The most important step is simply to start, even if it’s only with a small amount. Over time, those small actions add up to very big results.