Whether it’s a tax refund, a bonus at work, an inheritance, or a surprise lottery win, you can take a large step closer to eventual full home ownership by choosing to allocate all or a portion of any available lump sum funds, to making a one off extra payment against your outstanding mortgage.
As interest on your loan is calculated daily against the balance of the principal still owing, making an extra payment, will immediately reduce the outstanding principal amount and therefore have an impact on the total cost of your loan.
As such, any lump sum payment you make into you mortgage account will save you significant interest over the life of the loan, and reduce your loan term meaning that you will own your home sooner.
How Does the Extra and Lump Sum Calculator Work?
You will need to enter loan amount sought, the annual interest rate, term of the loan, lump sum payment amount, and specific point in time payment will be made.
Here is an example of how making a lump sum payment can impact your loan amount and reduce the time it takes to become mortgage free.
Let’s make your home loan amount $$600,000 and interest rate 3.5% over a 30-year term. Assuming you receive a bonus at work $15,000 and tax refund $5,000 at the same time. You deposit $20,000 into the loan account as lump sum after 1st year. As a result, your loan term reduced by 1.7 years and interest saved over the life of the loan is $33,603. If you pay this amount after 2nd or 3rd year, you can notice that you are saving less interest which means, that the earlier you reduce the outstanding principal, the less interest you pay over the home loan term and the smaller the number or repayments you will need to make.