25 years versus 30 years home loan terms

25 years versus 30 years home loan terms

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.

EXAMPLE

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.

EXAMPLE

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.

EXAMPLE

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.

Start comparing thousands of Australian home loans now and use the RateCity repayment calculator to work out what monthly repayments you can afford.

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Learn more about home loans

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

What is appreciation or depreciation of property?

The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

What is a redraw fee?

Redraw fees are charged by your lender when you want to take money you have already paid into your mortgage back out. Typically, banks will only allow you to take money out of your loan if you have a redraw facility attached to your loan, and the money you are taking out is part of any additional repayments you’ve made. The average redraw fee is around $19 however there are plenty of lenders who include a number of fee-free redraws a year. Tip: Negative-gearers beware – any money redrawn is often treated as new borrowing for tax purposes, so there may be limits on how you can use it if you want to maximise your tax deduction.

What do mortgage brokers do?

Mortgage brokers are finance professionals who help borrowers organise home loans with lenders. As such, they act as middlemen between borrowers and lenders.

While bank staff recommend home loan products only from their own employer, brokers are independent, so they can recommend products from a range of institutions.

Brokers need to be accredited with a particular lender to be able to work with that lender. A typical broker will be accredited with anywhere from 10 to 30 lenders – the big four banks, as well as a range of smaller banks, credit unions and non-bank lenders.

As a general rule, brokers don’t charge consumers for their services; instead, they receive commissions from lenders whenever they place a borrower with that institution.

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

How can I get a home loan with no deposit?

Following the Global Financial Crisis, no-deposit loans, as they once used to be known, have largely been removed from the market. Now, if you wish to enter the market with no deposit, you will require a property of your own to secure a loan against or the assistance of a guarantor.

Mortgage Calculator, Deposit

The proportion you have already saved to go towards your home. 

What is the ratings scale?

The ratings are between 0 and 5, shown to one decimal point, with 5.0 as the best. The ratings should be used as an easy guide rather than the only thing you consider. For example, a product with a rating of 4.7 may or may not be better suited to your needs than one with a rating of 4.5, but both are probably much better than one with a rating of 1.2.

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.

What is an ombudsman?

An complaints officer – previously referred to as an ombudsman -looks at formal complaints from customers about their credit providers, and helps to find a fair and independent solution to these problems.

These services are handled by the Australian Financial Complaints Authority, a non-profit government organisation that addresses and resolves financial disputes between customers and financial service providers.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Savings over

Select a number of years to see how much money you can save with different home loans over time.

e.g. To see how much you could save in two years by switching mortgages,  set the slider to 2.

Mortgage Calculator, Repayments

The money you pay back to your lender at regular intervals.