In simple terms, the longer your loan term is, the lower your monthly repayments will be. The catch is you'll end up paying far more in interest by the end of your loan.
Many homeowners, particularly first home buyers, tend to focus on the size of their repayments and feel more comfortable making lower payments over a longer period of time. Thirty-year loans are currently the most common option in Australia but it's worth considering whether a shorter-term loan could work for you.
Let's check the numbers to see the difference between taking out the same $450,000 loan at 6.5% p.a. interest over 25-years versus 30-years.
|
Loan details |
25-years |
30-years |
|---|---|---|
|
Loan amount |
$450,000 |
$450,000 |
|
Interest rate |
6.5% |
6.5% |
|
Monthly repayment (principal and interest) |
$3,038.43 |
$2,844.31 |
|
Total principal paid |
$450,000 |
$450,000 |
|
Total interest paid |
$461,529.53 |
$573,950.17 |
Taking out the loan over a 30-year term will see you pay $194 less a month in repayments but an extra $112,420 in interest than if you'd taken the same loan over 25-years. As you can see, the loan term makes a huge difference.
Cutting the cost of a 30-year loan
Yet even if you choose to take out a home loan over a 30-year period, it can be a great cost-saving strategy to make the repayments as if you'd taken it out over 25-years. That way you can have the psychological comfort of a longer loan term with the savings advantage of a shorter one.
You need to be sure the loan you choose allows to do this. It is usually permitted under most variable loans (but generally not fixed rate ones). Some lenders may levy extra repayment charges so be aware of the conditions of your loan.
Any extra payments you make towards your loan effectively reduce the principal and interest you pay and if there are times you can't manage the higher amount, you can pay the minimum 30-year repayment, knowing you are nicely ahead on your loan.
Our mortgage repayment calculator can help you decide what will be the best strategy for you.
Of course, there are many other cost-saving strategies to reduce the cost of your loan including making weekly or fortnightly payments or taking advantage of offset and redraw facilities.
Expert opinion on loan terms
Mortgage broker Chris Wisbey, general manager of Scene Finance, said choosing the term of a loan depends on your individual circumstances.
"The longer the loan term, the better your serviceability," Mr Wisbey told Your Mortgage.
"The shorter the loan term means higher monthly repayments so that can reduce your borrowing capacity.
"It's that simple, so it really boils down to the applicant and the amount they want to borrow. With property prices going up all the time, if you want to borrow as much as you can, longer terms can provide better affordability."
But it doesn't mean you're locked in for the full term of the loan. Mr Wisbey said it's quite rare for the average home loan to run for its full term in the current mortgage market.
"People tend to rate shop these days so we're seeing a lot more migration between lenders, every two or three years.
"Shorter loan terms can reduce your borrowing capacity. Longer term loans can effectively increase it, then you can keep an eye on what else is on the market."
Mr Wisbey also warns borrowers to be aware of exit fees and other such charges when they're looking to refinance.
View some of the lowest home loan rates in the market
Here are some of the most competitive home loan options on the market for you to consider what will best suit your circumstances.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.04% p.a. | 6.06% p.a. | $3,011 | Principal & Interest | Variable | $0 | $530 | 90% | 4.6 STAR CUSTOMER RATINGS |
| Promoted | Disclosure | |||||||||
5.99% p.a. | 5.90% p.a. | $2,995 | Principal & Interest | Variable | $0 | $0 | 80% |
| Disclosure | |||||||||||
6.09% p.a. | 6.22% p.a. | $3,027 | Principal & Interest | Variable | $10 | $220 | 80% | |||||||||||||
6.14% p.a. | 6.19% p.a. | $3,043 | Principal & Interest | Variable | $0 | $600 | 90% | |||||||||||||
6.18% p.a. | 6.33% p.a. | $3,056 | Principal & Interest | Variable | $10 | $450 | 70% | |||||||||||||
6.14% p.a. | 6.39% p.a. | $3,043 | Principal & Interest | Variable | $248 | $350 | 70% | |||||||||||||
6.18% p.a. | 6.21% p.a. | $3,056 | Principal & Interest | Variable | $0 | $845 | 80% | |||||||||||||
6.44% p.a. | 6.66% p.a. | $3,141 | Principal & Interest | Variable | $0 | $0 | 97% | |||||||||||||
6.44% p.a. | 6.44% p.a. | $3,141 | Principal & Interest | Variable | $0 | $160 | 70% | |||||||||||||
6.79% p.a. | 6.87% p.a. | $3,256 | Principal & Interest | Variable | $8 | $350 | 70% | |||||||||||||
6.79% p.a. | 7.16% p.a. | $3,256 | Principal & Interest | Variable | $0 | $0 | 90% | |||||||||||||
5.99% p.a. | 6.51% p.a. | $2,995 | Principal & Interest | Variable | $0 | $530 | 90% |
| Disclosure |
Photo by Veri Ivanova on Unsplash
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