Should You Put Your Tax Refund on Your Mortgage?
The average Australian tax refund is a few thousand dollars, and it arrives every July with no plan attached. Most of it gets absorbed into general spending within weeks. But a lump sum applied to your mortgage does something a lump sum spent never can: it keeps working for you every single month for the rest of the loan.
This page runs the numbers on one simple habit — putting an annual lump sum, like a tax refund or work bonus, straight onto the loan principal every year.
How it works
Every dollar you knock off your loan principal stops accruing interest immediately, and keeps not-accruing it for the remaining life of the loan. A $4,500 payment made in year one avoids interest on that $4,500 for up to 29 more years — that is why lump sums early in the loan punch far above their weight.
Because your scheduled repayment stays the same, the whole repayment keeps coming but a bigger slice of it now goes to principal rather than interest. The effect compounds: each lump sum accelerates every repayment that follows it.
Every July, Jamie in Brisbane gets a $4,500 tax refund. For nine years, it disappeared into "treat yourself" purgatory. In year ten, Jamie tried something different.
The worked example
The numbers on this page model a $650,000 loan at 6.2% over 30 years — a realistic Australian mortgage. Here is what changes when you apply the strategy (annual lump sum: $4,500):
| Bank’s plan | With this strategy | Difference | |
|---|---|---|---|
| Time to pay off | 30.0 years | 24.0 years | −6.0 years |
| Total interest paid | $783,177 | $602,756 | −$180,421 |
Drag the slider to change the assumption and watch the payoff date move:
How to do it
- Check your loan allows extra repayments without penalty (almost all variable-rate loans do; fixed loans usually cap them).
- When the refund or bonus lands, transfer it to the loan (or offset) before it reaches your spending account.
- Ask your lender to keep your scheduled repayment unchanged — you want the extra to shorten the loan, not lower the repayment.
- Model your own numbers in the calculator to see your payoff date move.
Watch-outs
- On a fixed-rate loan, check your annual extra-repayment cap before paying a large lump sum — exceeding it can trigger break costs.
- If your loan has redraw, the money usually remains accessible — but check redraw fees and minimums with your lender.
- If you have higher-interest debt (credit cards, personal loans), clearing that first almost always beats extra mortgage payments.
Frequently asked questions
Is it better to put a lump sum on the mortgage or in an offset account?
Mathematically they reduce interest identically — a dollar in offset and a dollar of extra principal both stop the same interest accruing. The difference is access and discipline: offset money stays fully accessible (and is easier to spend), while a principal payment is locked in unless your loan has redraw. If you might need the money back, offset wins; if you want it out of temptation’s reach, pay down the principal.
Does the timing of the lump sum matter?
Earlier is better, both within the loan and within the year. Interest on Australian home loans is calculated daily, so a lump sum paid in July saves more than the same amount paid the following June — and a lump sum in year 2 of the loan saves far more than the identical amount in year 20.
Will paying a lump sum lower my monthly repayments?
By default, no — your scheduled repayment stays the same and the loan just finishes sooner, which is what produces the big interest savings. Some lenders offer to "recast" the repayment down after a large payment; declining that is usually the sharper move.