Over the life of a home loan - sometimes up to thirty years - your financial circumstances can change dramatically. Starting a family, changing jobs, children leaving home and many other factors can alter your financial circumstances over the term of the loan. A home loan that is right for you at the beginning has the potential to become the worse mistake you ever made.

So with all the options available, how do you decide?

Flexibility is the key. The ability to make additional repayments on a home loan is an essential consideration for anyone contemplating possibly the largest and most important investment they will ever make. By making additional repayments you can significantly cut down the length of the loan, resulting in potentially huge savings in interest payments overall.

Repayments on a home loan cover both interest accrued on the remaining loan amount, and the actual principal of the loan that is, the original amount borrowed. Any additional payments made will go towards paying off the principal amount, resulting in lower interest charges. Substantial savings can be made just by putting a little extra into your home loan each month.

Case Study

Angus and Isobel have recently bought their first home. After all costs have been taken into account, they have been left with a home loan of $150,000 to be repaid over twenty five years. With an interest rate of seven per cent, the total interest paid on their loan is calculated at $168,051, making a grand loan total of $318,051.

By making regular additional repayments of just $20 a month, Angus and Isobel can cut down their loan term to twenty three years and ten months. Interest payments will also be cut dramatically to $158,389. Over the life of the loan, Angus and Isobel will pay an extra $5,720 ($20 a month) and save $9,662 in interest, resulting in a total saving of almost four thousand dollars.

Let's say Angus and Isobel can afford to put an extra $50 a month into their home loan. They would save over $8,600 and almost three years on the life of their loan.

How do I make additional repayments?

Making additional repayments on your home loan can make a huge difference. Even if regular payments are not possible, irregular, one-off payments whenever your financial situation allows can also save you money in the long term.

So, what kind of loan do I need?

Home loans are customarily set-up either as fixed or variable rate loans, or a mixture of both. In general, variable rate loans offer the most flexibility where additional repayments are concerned, with many allowing customers to make an unlimited number of additional repayments throughout the life of the loan. In many cases, this is a free service offered as a standard feature of a variable rate home loan.

Be aware of making additional repayments on fixed-rate or 'no-frills' (basic) home loans. Many lenders will charge a fee each time this occurs. You may also find that by reducing the total period of the loan, further fees and charges may be levied to pay it out early. In some cases, these fees can be substantial enough to negate the benefits of making the additional repayments in the first place.

So, whichever way you decide to go with your home loan, don't forget to consider the advantages available to you through additional repayments. Whether you make this a regular payment or irregular one-off payments whenever you have some spare money, the financial benefits can be considerable - which is great news for everyone.