Coming to terms with your loan

Author: ME

Published at: 6/21/2016 3:29:02 PM

 

Coming To Terms With Your Loan

 

We explain why your loan term matters, with tips to select the term that’s right for you.

 

It’s kind of scary to think the term ‘mortgage’, literally means “a debt till death”. Of course, that’s not the case at all. The standard home loan term is 25 years. There’s no great cosmic significance to this term. It became the benchmark decades ago because it more or less coincided with the average working life of home owners.

 

But like a lot of things, what worked in the past doesn’t always apply so well today. And for many home buyers the 25-year loan term is about as relevant today as the idea of the family gathering around the wireless for a night of sophisticated entertainment.

 

The trouble is, some lenders haven’t…well, come to terms with this. They insist on sticking with 25-year terms.

 

Others, like ME home loans let you choose from a variety of terms - anything from 5 years up to 30 years. Sweet.

 

Less is more

 

So which term should you choose?

 

The general rule of thumb is to select the shortest loan term possible. The shorter the term, the less interest you’ll pay in total. Makes sense. After all you’re paying off the balance sooner. The sting is that a shorter term means higher monthly repayments.  

 

So selecting the term means weighing up what you comfortably afford to repay each month while still aiming to clear your home loan sooner.

 

Check out the table below to see how regular repayments vary in line with different terms. Or use ME’s Loan Repayments calculator to see how your likely payments will change according to the term.

 

Loan: $400,000

15 year term

25 year term

30 year term

Monthly repayment

$3,058

$2,221

$2,024

Total interest cost

$150,427

$266,318

$328,771

Assumes reference rate of 4.49%

 

You’re in the driver’s seat

 

Here’s the thing though. The loan term should be seen as a guide to how long you’ll be living with your home loan. As a borrower, you have near-complete control of how quickly you pay off your home.

 

The key lies in making extra repayments. Adding a few extra dollars to each month’s payment will fast track your way to loan freedom.

 

There’s no great magic to this. Just think back to Grade 6 maths when your teacher explained compounding. Okay, maybe it was so interesting back then. Let’s recap what’s involved.

 

Each time you pay a bit extra off your loan the additional payment comes straight off the balance. This lowers the interest cost for that month. So more of the next repayment goes towards reducing the loan. It’s like compounding interest on savings, only it works in your favour – not the lenders.

 

See for yourself the magic of extra repayments with our extra repayments calculator.  A single additional dollar each week can see you pocket valuable savings on loan interest – and cut years off your original loan term.

 

Terms, conditions, fees and charges apply. Applications are subject to credit approval.

Members Equity Bank Limited ABN 56 070 887 679 AFSL and Australian Credit Licence: 229500

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