Lump Sum vs Extra Repayments Calculator
Compare paying a lump sum today against making equivalent monthly extra repayments — see which saves more interest and time.
Lump Sum vs Monthly Extra Repayments: Which Wins?
When you have extra money to put towards your mortgage — whether a tax refund, bonus, inheritance, or savings — you face a choice: pay it all now as a lump sum, or spread it as additional monthly repayments over time. The mathematics clearly favours the lump sum in almost every scenario, but monthly extra repayments are a powerful alternative when a lump sum isn't available.
Why a Lump Sum Almost Always Wins
The reason is compound interest. When you make a lump sum payment today, the entire amount immediately reduces your principal balance. From that moment forward, interest is calculated on a lower base — and the interest you save also stops compounding. Every dollar of interest you avoid also avoids the interest on that interest in future periods.
By contrast, monthly extra repayments reduce your principal gradually over time. In month 1, only the first payment reduces the balance. In month 12, the twelfth payment finally joins the effort. The lump sum has been saving interest on all $X since day one.
Monthly Extras: The Consistent Approach
Not everyone has a lump sum available, and that's fine. Monthly extra repayments — even modest amounts like $200–$500 — are one of the most effective financial habits an Australian homeowner can build. The key is starting as early as possible and maintaining consistency. The calculator uses the lump sum amount divided by the remaining term in months as the equivalent monthly extra — this is the "fair" comparison amount, since over time both approaches deploy the same total dollars.
The Offset Account Alternative
For borrowers who want the interest-saving benefit of a lump sum but need to keep the money accessible, an offset account delivers identical interest savings to a direct lump sum repayment. Every dollar in your offset reduces your loan balance for interest calculation purposes. The difference is liquidity: offset funds are accessible at any time, while direct extra repayments may require a redraw request. For owner-occupiers, both approaches are equally effective. For investors, offset is often preferred as it preserves the loan balance for tax deductibility purposes.
Making the Most of Windfalls
Tax refunds, work bonuses, inheritances, and asset sale proceeds are common sources of lump sums for Australian mortgage holders. Putting these directly onto a variable rate mortgage (or into an offset account) is a highly efficient use of windfall income, particularly when mortgage rates exceed what you could earn risk-free from savings accounts or term deposits. The guaranteed, tax-free "return" equals your mortgage interest rate — typically 6%+ in the current environment.