Is It Better to Have A 10, 20 or 30 Year Mortgage?

One of the biggest expenses you’ll incur when buying a home is the interest on your home loan. Yet when applying for a loan, the focus is often on the monthly repayment amount and how it fits within your budget. This makes perfect sense because home loan repayments need to be affordable, but it also means that you’re more inclined to choose the longest term possible to ensure your monthly commitment is manageable. Could it be a mistake to select a lengthy loan term?

How much difference does a loan term make on interest charged?

Your loan term has a significant impact on the overall interest you’ll pay over the life of your loan. Take a look at this home loan for $300,000 with a 3% interest rate, and you’ll see what we mean.

Source: Yellow Brick Road Compare Loan Repayments calculator.

A shorter loan term means a larger repayment commitment, but it helps to reduce your original loan balance quickly which equates to far less interest charged overall. A longer loan term will incur more interest due to time and a slower reduction of your loan balance, but it will be kinder on your hip pocket each month.

With interest being calculated daily on your home loan balance and charged to the loan account each month, whatever you can do to reduce the principal loan balance as quickly as possible will benefit you in the long run.

Can I choose my loan term?

Generally, the maximum loan term offered by banks or finance providers is 30 years. Even though you can choose your loan term, it is often determined by your age and your ability to service the proposed home loan debt. Lenders may not want to extend a loan term past your expected retirement age so they may stipulate a shorter term to ensure your loan is paid off by that time.

The lender is also responsible for making sure that repayments don’t place you in mortgage stress, so they will usually calculate serviceability over the longest term possible within their preferred lending guidelines.

How can I pay my home loan off sooner?

Finding ways to make extra repayments that reduce your principal loan balance right from the start is your answer to cutting down the interest charged.

Many home loans, including fixed rate loans, have flexible repayment options these days. Use this to your advantage and reduce the interest you pay over the term of your loan with a few easy actions you can implement straight away.

• Switch to fortnightly or weekly repayments
• Calculate payments over a shorter term and set this as your regular repayment
• Keep repayments the same when interest rates decrease
• Put unexpected windfalls straight into the loan
• Use an offset account or redraw facility, so all your money is working for you every day.

Should I apply for the maximum loan term when I refinance?

The loan and lender you choose when you purchase your home may not always be the right one for you. With attractive refinance offers from other banks, it makes sense to shop around and at the same time consider improving your loan term.  If you’ve been comfortably meeting your repayments on a higher interest rate, it pays to keep them at this level. You’ll get the benefit of the interest rate reduction, and your usual payment will work a lot harder for you.

Structuring your home loan and repayments correctly could save you tens of thousands of dollars over the life of your loan. Let a Yellow Brick Road Mortgage Broker run the numbers and put you in control of your home loan.

• Useful reading: How to Get the Most out of Refinancing