Yes, a longer loan term means lower repayments each month. But, the more interest you'll end up paying over the life of your loan. A few years can make a big difference in the overall cost of your home loan.
Home loans can be 10, 15, 25, 30 or even 40 year loan terms. A 30 year loan term is the standard, with 40 year loan terms only offered by a very small number of lenders.
Taking out a 30 year loan term instead of a 25 year loan term mean you will have lower monthly repayments, but you'll end up paying more interest over the life of the loan. How much more? Let's see...
| Loan details | 25 Years | 30 Years |
|---|---|---|
| Loan amount | $600,000 | $600,000 |
| Interest rate | 6.00% p.a. | 6.00% p.a. |
| Monthly repayment* | $3,860 | $3,600 |
| Monthly extra cost | $240/m | $0 |
| Monthly extra cost over 25 yrs | $72,000 | $0 |
| Total repayments over 30 years | $1,159,743 | $1,295,030 |
| Difference | +$135,287 |
* based on monthly, principal and interest repayments
In this example, the choice of a 25 year home loan length costs the borrower an extra $240 per month compared with a 30 year loan. That adds $72,000 to the cost over the full loan period.
But it also saves the borrower a tonne long-term. You'll pay less in interest, not to mention the fact that it buys you 5 years of being completely mortgage free, as you'll own your home outright 5 years sooner. So in this example, it effectively buys you 60 free months.
Bottom line: a 25-year loan term costs you $72,000 more in monthly repayments, but saves you $135k in interest and saved payments. We have a clear winner!
"Lenders usually offer the option to choose a loan term when refinancing. If you prefer to maintain your existing loan term rather than reset it to 30 years, you can request this during the application process to avoid extending the overall length of your mortgage."
One mistake to avoid is refinancing to a cheaper interest rate and taking out a new 30 year term. This can cancel out your refinancing savings, as you can see below.
| Principal & Interest (P&I) loan | Original loan | Refinancing after 10 years |
|---|---|---|
| Loan value | $800,000 | $668,037 |
| Loan term | 30 years | 30 years |
| Interest rate | 6% | 5.50% |
| Total P&I to pay | $1,726,706 | $1,365,495 (+ the $574,968 already paid during the first 10 years) |
| Total P&I to pay | $1,726,706 | $1,940,463 |
Assuming you didn't refinance again and you stayed on the same interest rate, you'd end up paying $1,940,463 over the life of the loan. That's $361,211 more than you would have paid on the original loan.
If you're thinking of taking out a longer loan term to cut down on the monthly repayments, but (understandably) don't love the idea of paying so much more over the life of the loan, you can make use of an offset account.
By adding enough money into your offset account, you'll keep your monthly repayments the same but the payment will go directly to your principal loan amount. This means you could end up repaying your loan back faster than the loan term, thereby cutting down the overall interest paid.
| Response | |
|---|---|
| Yes | 76.62% |
| No | 23.38% |
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