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One of the major trading banks is running a promotion where you can win a year’s interest back on your mortgage.

This promotion serves as quite a powerful example of how much of an impact extra repayments can make on a standard mortgage.

Consider a mortgage of $400,000, at an average interest rate of 7 per cent. On a 30-year term your first year’s interest would be $27,871.

Total interest payable over 30 years would be $558,036.

If you took the first year’s interest – $27,871 – and paid that into your mortgage as a single lump sum in the first year you would see the following:

Your loan term would drop from 30 years to 24.5 years; and

Your total interest paid would drop from $558,036 to $402,537, a difference of $155,499.

Consider those numbers: Just under $28,000 can change your mortgage result by $155,000 and 5.5 years!

Obviously most people will not have $28,000 sitting around. However, a working couple who are without children but have a recent mortgage might be able to manage an extra $1000 a month for two years and achieve a similar result. Another option would be making extra repayments of $200 a month for the life of the loan to save more than $125,000 and pay it off five years faster.

It always pays to be proactive with your loan; extra repayments will always mean your mortgage savings in interest will be multiples of the actual repayment amount, due to the nature of compounding.

It always pays to be proactive with your loan.