emergency fund v extra mortgage repayments

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Balancing extra mortgage repayments with saving an emergency fund
Emergency Fund v Extra Mortgage Repayments. Image by psdesign1 @stock.adobe.com

Should you focus on building an emergency fund or should you pay off your mortgage as quickly as possible?

As it turns out, these two options don’t have to be mutually exclusive.

You can have the best of both worlds.

If your mortgage has a redraw facility or an offset account, you can pay down your mortgage quickly, saving money on interest whilst building a potential emergency fund at the same time.

(The usual disclaimer: This is general information only. I’m not a financial planner, and you should always consult a qualified advisor when making financial decisions.)

An emergency fund: why you need one

According to a recent article, more than a quarter of households [surveyed] admitted that they would run into financial difficulty if they lost their jobs.

Job loss is a scary thought. How would you pay the bills, keep a roof over your head and put food on the table if you lost your job tomorrow and it took months for you to find a new job?

Even in good economic times, businesses fold. Or downsize. Or restructure.

People get ill or have accidents.

Your emergency fund is your peace of mind. It’s your insurance against future risk. It is there to cover unexpected setbacks and take the financial stress out a bad situation.

How Extra Mortgage Repayments Can Save You Big Bucks

If you have a mortgage, small extra repayments add up to BIG savings in interest over the course of a loan.

Take the average $400,000 mortgage with a 30-year term and with interest at 7%. Making fortnightly repayments and paying an extra $10 each fortnight will save you a whopping $151,432 over the course of the loan (which will be reduced to 23 years!)[Online calculator here].

That’s no small change.

If you were to try and save $20 a month towards your emergency fund instead, it would take you 82 years to save $150,000 (at 4% interest) and the interest earned on those savings would be taxable [calculator].

Making your mortgage your emergency fund

So here’s how it works: you make extra repayments on your mortgage and reap the benefits.

If you lose your job and you need funds, then you can redraw these extra repayments. Your extra repayments transform into your emergency fund in the event of an emergency.

There are, however, a few practicalities that you need to consider.

First, you need to check with your lender that your mortgage allows extra repayments and has a redraw facility or an offset account. If you do have these facilities, check whether there are any fees or rules when using them.

Secondly, it’s important to note that you may not be able to redraw funds during a fixed interest period without breaking the contract and generating break fees. Ask your lender to disclose possible break fees and take these into consideration when deciding on a fixed period.

If you’re in the market for a new mortgage, make sure you take these things into consideration.

It is best to be aware of your choices before you need them, so take the time now to understand how your mortgage works – it will save you stress and heartache later if you ever do find yourself in a bad situation.

The hidden benefit to building an emergency fund this way is that you don’t have money sitting in the bank, tempting you to spend it. You may, however, still want to have a month’s worth of expenses in a bank account for quick cash flow, to cover any time it might take to redraw funds from your mortgage or in the case of small emergencies.

So if you’re asking yourself whether you should put your energy into building an emergency fund or into paying your mortgage down as quickly as possible, remember that there’s a third option – doing both.


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  1. We are planning on buying at the end if the year. We are going to get a split loan. Majority of it on fixed rate and a smaller portion variable. That way we get lower interest on the bulk, but will still be able to pay extra off and have that redraw/emergency fund.

  2. Great article! I went for a fixed home loan (buying alone & for the first time). Which meant I created an emergency fund outside the loan for the first two fixed years. I do pay the maximum extra payments ($5k pa). At the end of the my fixed term, I plan to move to a variable/fix split, with an offset, and what’s now my emergency fund will help pay down the mortgage. I could have done this straight up, but I didn’t like the idea of my repayments changing too much early on – didn’t know how scary a mortgage might be (not at all, it would seem!)

  3. That’s actully what I have been doing, when the intrest rate drops i don’t change my payment & i’m now paying $100 extra a month, i think i would find it hard to save that much. Which actually may come in hady as i’m being made redundat in a months time.

  4. The best thing about an emergency fund is it keep us relying on the credit card. Most of us can final cut them up if we have adequate emergency funds. Great thinking to consider getting some “use” out to the fund in offset account or redraw.