Lump Sum Payments vs Extra Repayments: Which Strategy Saves More?

Published: January 24, 2026
Reading Time: 7 minutes
Location Focus: Melbourne, VIC

The Question Every Investor Asks

If you have extra money available, should you make a lump sum payment toward your mortgage or increase your regular repayments? Both strategies reduce your loan balance and interest costs, but they work differently. Understanding the differences helps you choose the strategy that works best for your situation.

How Lump Sum Payments Work

A lump sum payment is a one-time payment toward your mortgage principal. You might make a lump sum payment when you receive a bonus, tax refund, inheritance, or other windfall.

When you make a lump sum payment, you immediately reduce your loan balance. This reduction decreases the interest you pay on that balance going forward. The impact is immediate and permanent.

For example, if you make a $5,000 lump sum payment on a $400,000 mortgage at 3.60%, you immediately reduce your loan balance to $395,000. This saves approximately $180 in interest over the remaining life of your loan.

How Extra Repayments Work

Extra repayments involve increasing your regular monthly or fortnightly repayment amount. Instead of paying $1,850 per month, you might pay $1,950 per month. The extra $100 goes directly toward your principal.

Extra repayments have a similar effect to lump sum payments over time, but they work gradually. Each extra repayment reduces your balance slightly, which reduces future interest.

Comparing the Two Strategies

In terms of interest savings, lump sum payments and extra repayments are mathematically equivalent over time. If you make a $5,000 lump sum payment or make $100 extra repayments for 50 months, the interest savings are essentially the same.

However, the strategies differ in important ways that affect which is better for your situation.

Lump Sum Payments: Advantages

Lump sum payments offer several advantages. First, they're flexible. You make them when you have money available, without committing to ongoing higher repayments.

Second, they're psychologically satisfying. Making a large payment and seeing your balance drop significantly can be motivating and reinforce your commitment to paying down your mortgage.

Third, they're efficient if you have variable income. If your income fluctuates, lump sum payments let you pay down your mortgage when income is high without overcommitting to higher regular repayments.

Fourth, they maintain flexibility in your regular budget. Your regular repayment stays the same, so your budget doesn't need to adjust.

Lump Sum Payments: Disadvantages

Lump sum payments also have disadvantages. First, they require discipline. You need to actually make the payment when you have money available. Many people intend to make lump sum payments but end up spending the money instead.

Second, they don't build a habit of higher repayments. Once the lump sum is paid, your regular repayments return to their normal level.

Third, they require having money available. If you don't have a windfall or savings, you can't make a lump sum payment.

Extra Repayments: Advantages

Extra repayments also offer advantages. First, they build a sustainable habit. By increasing your regular repayment, you commit to paying down your mortgage consistently.

Second, they're automatic. Once you increase your repayment amount, the extra payment happens every month without requiring additional action.

Third, they're psychologically powerful. Many people find that increasing their regular repayment and maintaining it over time is more satisfying than making occasional lump sum payments.

Fourth, they're achievable without windfalls. You don't need a bonus or tax refund. You just need to find an extra $50-100 in your monthly budget.

Extra Repayments: Disadvantages

Extra repayments also have disadvantages. First, they reduce your monthly cash flow. If you increase your repayment by $100, you have $100 less available each month for other expenses.

Second, they're less flexible. If your financial situation changes and you need to reduce your repayment, you'll need to contact your lender.

Third, they're less psychologically satisfying in the short term. Increasing your repayment by $100 per month doesn't feel as significant as making a $5,000 lump sum payment, even though the long-term impact might be greater.

The Optimal Strategy: Combination Approach

Rather than choosing between lump sum payments and extra repayments, the optimal strategy combines both. Increase your regular repayment by an amount you can comfortably afford (perhaps $50-100 per month), and make lump sum payments when windfalls occur.

This combination approach provides the benefits of both strategies. You build a sustainable habit of higher repayments while maintaining the flexibility to make lump sum payments when opportunities arise.

For example, you might increase your regular repayment by $75 per month and commit to making a $2,000 lump sum payment each year when you receive your tax refund. This combination significantly accelerates your mortgage payoff.

Special Considerations for Melbourne Investors

Melbourne investors should consider their investment strategy when deciding between lump sum and extra repayments. If you're planning to purchase additional investment properties, maintaining cash flow flexibility might be important. In this case, lump sum payments might be preferable to extra repayments.

However, if you're focused on paying down your current mortgage, extra repayments might be more effective because they build a sustainable habit.

A mortgage broker can help you evaluate your situation and recommend a strategy that aligns with your overall investment goals.

Calculating the Impact

To understand the impact of different strategies, consider a $400,000 mortgage at 3.60% with 25 years remaining.

Current monthly repayment: $1,850

Impact of $100 extra monthly repayment: Saves approximately $80,000 in interest and pays off the loan approximately 5 years earlier.

Impact of $5,000 annual lump sum payment: Saves approximately $60,000 in interest and pays off the loan approximately 4 years earlier.

Impact of combining both strategies (extra $100 monthly plus $5,000 annual lump sum): Saves approximately $140,000 in interest and pays off the loan approximately 9 years earlier.

Taking Action

If you have extra money available, don't let it sit idle. Whether you choose lump sum payments, extra repayments, or a combination of both, putting that money toward your mortgage accelerates your payoff and saves substantial interest.

Work with a mortgage broker to calculate the impact of different strategies for your specific situation. A broker can show you exactly how much you'll save and how much faster you'll pay off your mortgage with different approaches.

The Bottom Line

Both lump sum payments and extra repayments effectively reduce your mortgage and save interest. Lump sum payments offer flexibility, while extra repayments build sustainable habits. The optimal strategy combines both approaches, providing the benefits of each while accelerating your mortgage payoff.

Ready to accelerate your mortgage payoff? Call Frontier Finance at 0413 798 731. Our brokers will calculate the impact of different strategies and help you choose the approach that works best for your situation.

Disclaimer: This article provides general information about mortgage reduction strategies. Specific calculations and recommendations depend on your individual circumstances, including your current loan terms, financial situation, and goals. Please consult with a qualified mortgage broker or financial advisor to discuss which strategies are appropriate for your specific situation.