How a lump sum works on a home loan

A lump sum is a one-off payment on top of your normal repayments: a bonus, a tax refund, an inheritance, the proceeds of selling a car. Your minimum repayment does not change when you make one. What changes is the balance the bank charges interest on from that day forward, so every month after it a little more of your normal repayment goes to principal instead of interest.

Timing is most of the result

Take a $500,000 loan at 5.50% over 30 years. A $20,000 lump sum paid in year two clears the loan two and a half years early and saves about $66,800 in interest. The same $20,000 paid in year ten saves about $37,300. Paid in year twenty it saves about $13,800. Same money, three very different outcomes, because interest is charged on the balance and the balance is biggest at the start.

The practical rule: if you are going to put money on the loan, do it now rather than waiting to build up a bigger amount.

Pay it in, or park it in an offset?

Paying the lump sum straight onto the loan and leaving it in a 100% offset account save the same interest. The difference is what happens if you need the money back. In an offset it is yours to withdraw any time. Paid onto the loan, getting it back depends on your lender's redraw rules, and on a fixed-rate loan you may not be able to redraw at all. For most people the offset is the safer home for a lump sum, and it works just as hard.

Fixed loans and break costs

Most fixed-rate loans cap extra repayments, often at $10,000 or $20,000 a year, and charge break costs above that. Check your cap before paying in a large sum. If you are close to the end of a fixed term, it can be worth waiting until it rolls to variable.

Related tools: the Extra Repayment Calculator models a regular amount rather than a one-off, and the Effective Interest Rate Calculator shows what the same money does sitting in an offset.

Last updated: October 2026