We have come into some money from a family inheritance. If we pay $100,000 on our home loan will it automatically reduce our monthly repayments?

Hi Irene,

No it won’t reduce your repayments it will just reduce how much interest you pay each month.

Your monthly payments are made up of part interest and part principal repayment. This minimum repayment is set based on your interest rate and the term of your loan (eg 30 years). Over time your monthly repayments slowly become less interest and more principal repayment but the same dollar amount.

By making the lump sum payment your monthly repayments will be less interest & more principal. Which means you pay your loan off sooner.

Having said all of this, you may be able to ask your bank to recalculate your minimum payment - taking into the lump sum. Or you could refinance (will likely incur some fees) to reduce your monthly payment.

Regards
James

Hi Irene

If you place the $100k into your home loan; your balance will obviously reduce; however these funds will be placed into redraw, meaning that you can redraw these funds back out if you wish to.

You will need to do two things to reduce your loan repayments:-

1. ask your lender to cancel the amount in redraw (I.E. the $100k)
2. ask your lender to recalculate your repayments based on your reduced balance over the remaining term of your loan. This will then reduce your loan repayments accordingly.

I do recommend however that you maintain your current level of repayments for as long as you can as this will allow you to pay off your loan much quicker than if you just pay the minimum repayments.

You should also look at if your current lender/ loan product/ rate are suitable for you. We can assist you with this if required.

Regards
Sam Zammit
South West Lending Solutions
1800 824 325
0414 727 308
sam@southwestlendingsolutions.com.au