Interest is charged on the outstanding balance, which is at its largest at the start of a loan. So an early repayment is mostly interest with a small principal share, and the ratio reverses over the term. An extra repayment made early removes principal that would otherwise have accrued interest for the rest of the loan, which is why Moneysmart says extra payments in the early years reduce the interest paid over the life of the loan.
An amortising home loan charges interest on what is still owed. Everything that feels strange about the first years of a mortgage follows from that one sentence.
Key Takeaways
- Interest accrues on the outstanding balance, which is largest at the start, so early repayments are mostly interest.
- Moneysmart, on paying off a mortgage faster: "In the early years of a home loan, most of your repayment goes towards interest."
- An extra repayment removes principal that would otherwise accrue interest for every remaining period.
- Halving a monthly repayment and paying it fortnightly makes an extra month of repayments a year, because a year holds 26 fortnights.
- An offset balance reduces the balance interest is calculated on without the money leaving the borrower's reach.
Why the ratio starts where it does
A scheduled repayment on an amortising loan is a single fixed amount that does two jobs at once: it pays the interest that has accrued since the last repayment, and whatever is left over reduces the principal.
At the start of a loan the balance is at its maximum, so the interest portion is at its maximum too, and the leftover is small. Once that small amount comes off the principal, the next period's interest is charged on a slightly smaller balance, so slightly more of the identical repayment falls through to principal. The effect compounds quietly in the borrower's favour.
By the closing years the position has inverted and almost the whole repayment is principal. The repayment never changed. Only the split did.
That is why a borrower who checks the balance after two years often concludes something has gone wrong. Nothing has. The loan is doing exactly what the arithmetic requires, and the arithmetic is heavily weighted against the borrower at the point where the balance is largest.
What an extra repayment actually buys
An extra repayment is not a discount on the interest already accrued. It removes principal, permanently, and principal that is gone cannot accrue interest again.
The value of that removal depends almost entirely on when it happens, because what is being bought is the interest on that amount for every remaining period of the loan. Money removed in year two avoids interest for the remaining twenty-eight years. The same amount removed in year twenty-eight avoids interest for two.
Moneysmart's guide to paying off a mortgage faster puts the same point plainly: "In the early years of a home loan, most of your repayment goes towards interest. Extra payments during this time reduce the interest you pay over the life of the loan."
There is a second effect that is easy to miss. Because most lenders leave the scheduled repayment unchanged after an extra payment, the loan simply reaches zero sooner. The saving therefore arrives as a shorter term rather than as smaller monthly payments, and a borrower looking for relief in the monthly figure will not find it there.
The fortnightly schedule, and why it works
Paying fortnightly is often described as a way to reduce interest by paying more often. The compounding effect of the timing is real but small. The large effect is arithmetic sleight of hand, and it is worth understanding rather than being sold.
Where a lender takes the monthly repayment and halves it, the borrower makes 26 half-payments a year. Twenty-six halves are thirteen months of repayment, not twelve. As Moneysmart describes it, paying half the monthly amount every two weeks means "you end up making the equivalent of an extra month's repayment each year (as each year has 26 fortnights)".
So most of the benefit attributed to fortnightly repayments is an extra repayment in disguise. The same result follows from paying monthly and adding one extra repayment a year, and a borrower whose pay cycle is monthly may find that simpler.
The distinction matters because a lender that calculates a true fortnightly repayment, rather than halving the monthly one, produces a schedule with none of that effect in it.
Offset and redraw are different instruments
Both reduce interest. They differ in where the money sits, and that difference decides which one suits a household.
An offset account is a separate account whose balance is subtracted before interest is calculated. Moneysmart describes the mechanism directly: the offset balance "reduces the balance your lender uses to calculate interest". The money remains ordinary savings, available at any time, and it earns its return by reducing interest rather than by paying interest.
A redraw facility is what gives access to money already paid into the loan as extra repayments. The principal really has been reduced, and the redraw is a request to borrow some of it back. Lenders may impose limits or fees on that, and the terms can change.
For a household that may need the money, the distinction is the whole decision. That is a description of how two structures differ, not a suggestion to use either.
Where to look next
The mortgage repayment calculator shows the repayment and total interest for a given amount, rate and term, and changing the term is the quickest way to see how much of the lifetime cost the term field controls. The mechanics of offsetting are set out in the guide to offset accounts, and the comparison rate is the figure designed to carry the fees that no repayment number contains.
Sources
- Moneysmart, Pay off your mortgage faster - extra repayments, the 26-fortnight effect, offset and redraw
- Moneysmart, Choosing a home loan - the comparison rate, fees, and the loan term trade-off
- Moneysmart, Interest-only home loans - why a loan that pays no principal does not reduce
Not financial advice, and not a recommendation of any product or institution. Reviewed by the Tradergy editorial team, September 2026.
Common questions
Why does my loan balance barely move in the first few years?
Because interest is charged on the balance outstanding, and at the start of a loan that balance is at its largest. Most of each early repayment covers the interest accrued for that period, leaving a small share to reduce the principal. The share going to principal grows every period as the balance falls.
When is an extra repayment worth the most?
Early. An extra repayment removes principal permanently, and that principal would otherwise have accrued interest for every remaining period of the loan. The same amount paid near the end of the term removes interest for only the periods that are left.
Does paying fortnightly really save interest?
It usually does, but not for the reason people assume. Where a lender takes the monthly repayment and halves it, a year contains 26 fortnights rather than 24 half-months, so an extra month of repayment is made each year without it feeling like one. That extra repayment is where most of the saving comes from.
Is an offset account the same as an extra repayment?
Not quite. An offset balance reduces the balance the lender uses to calculate interest, so it lowers interest without being paid into the loan, and the money stays available. An extra repayment reduces the loan itself and is only reachable again through a redraw facility, which can carry limits or fees.
Does an extra repayment lower my monthly repayment?
Usually not. Most lenders keep the scheduled repayment the same and let the loan finish earlier, so the saving arrives as a shorter term rather than lower payments. Some will recalculate the repayment downward on request, which keeps the original term and gives up much of the interest saving.