There are a lot of decisions that have to be made when choosing a home loan. One of the most important is the loan term length. When you are paying off a loan over such a long time, five years doesn’t seem like much, but it can make all the difference financially.
When it comes to selecting a loan term, most lenders will offer you either 25 or 30 years to repay your home loan in full. But this is often flexible – some borrowers will repay the loan sooner, while those who default or defer payments due to financial struggles may end up repaying the loan over a longer period than they initially anticipated.
25 years vs 30 years
When you’re considering borrowing money that will take close to three decades to repay, the extra five years may seem insignificant.
Most people who choose a 30 year loan term instead of a 25 year loan term do so because the monthly repayments are significantly less.
A $300,000 loan with an interest rate of 7.1 percent paid over 30 years may set you back around $2000 each month. Cut the loan to 25 years, and your repayments may increase by $140 each month, so the longer term may seem more affordable.
But when you do the maths, you soon realise that while you are paying off less monthly, you are in fact going to pay a lot more in the long run on interest. That’s because by increasing the loan term, you’re maximising the amount of interest paid.
The interest paid on the 25 year home loan mentioned above is around $342,000. Pay the same loan out over 30 years and you’ll pay $426,000 in interest. That’s an extra $84,000 interest for the sake of saving $140 each month.
Shrink your loan further
For those of you who initially opted for a 25 year loan term, there are still big savings to be made on your home loan if you can accelerate your repayments even more.
By accelerating your repayments on the above mentioned loan by just 10 percent or $215 extra each month, you can save around $82,500 in the long run and repay a 25 year loan in just 19 years and 10 months!
Don’t stress your budget too much but if you do have the extra funds, putting it towards paying off your home loan sooner will greatly benefit your financial future.
Compare interest rates and save
Home loan savings don’t only end with loan terms. It’s important to find a home loan with great interest rates, as this will also impact how much total interest you pay over the term of your loan.
It’s also worth looking at the Comparison Rates, which combine each home loan’s advertised interest rate with its fees and charges, to provide a more accurate estimation of the loan’s total cost to you. Because lenders are required by law to display Comparison Rates in their advertising, all home loan Comparison Rates are calculated based on a loan of $150,000 for a 25 year term, to maintain consistency. If you’re considering a 30-year term on your home loan, consider asking potential lenders for recalculated Comparison Rates to get a better idea of which offers can provide the most value.
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