“Mortgage” literally means “a debt till death”. Fortunately, getting the right home loan could save you money – and mean the ‘til death’ part gets lost in translation.
The standard home loan term is 25 years but there’s no great cosmic significance to this length. It became the benchmark decades ago because it more or less coincided with the average working life of home owners.
Like corded phones and not having seatbelts in cars, what worked in the past isn’t always right for today. For many buyers, a 25- or 30-year mortgage simply isn’t relevant. They have other plans, like upgrading their home, working overseas and living long enough to have cool robot arms.
That’s why the home loan market has evolved with us.
So which home loan term should you choose?
Every month you have a mortgage you pay interest on the full remaining balance. The faster you pay it off, the less interest you’ll pay in total.
On the other hand, a shorter term means a higher monthly payment. The right home loan term for you depends on what you can afford to repay without waking up in panic sweats at 3am.
This table shows how regular repayments vary with different terms. You can also use ME’s loan repayments calculator to see how your payments will change if you adjust the term of your loan.
It’s also worth noting that paying fortnightly could save you extra cash too – as more regular repayments reduce the amount you’re being charged interest on each time.
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Loan: $400,000
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15 year term
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25 year term
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30 year term
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Monthly repayment
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$3,058
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$2,221
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$2,024
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Total interest cost
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$150,427
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$266,318
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$328,771
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Assumes reference rate of 4.49%
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Remember, you’re in the driver’s seat.
Your loan term is just a guide. Situations change over time; what you can pay now might be different from what you can pay when your travelling cat circus scheme pays off.
As a borrower, you have near-complete control of how quickly you pay off your home. The key is making extra repayments. Adding a few extra dollars to each month’s payment will put you on the fast-track to loan freedom.
Each time you pay a bit extra off your loan the additional payment comes straight off the balance (this is called the ‘principal’). This lowers the interest cost for that month. When you pay again next month, your interest is calculated on this new balance, 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.
ME’s extra repayments calculator can show you how much you’ll save in real numbers. Even small payments can cut your home loan time. A single additional dollar could take years off your original loan term. That’s the equivalent of just one standard Australian postage stamp a week, and you’ll hardly notice it’s missing.
This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.