The longer the term is, the lower your monthly repayments will be, but the more interest you'll end up paying over the life of your loan. A few years can make a significant difference in the overall cost of your home loan.
Length of mortgage comparison
Generally speaking, home loan terms can include 10, 15, 25, 30 or even 40 year loan terms. 25 and 30 year loan terms are the most common, with 10 and 15 year loan terms generally being confined to interest-only repayments and 40 year loan terms only offered by a small number of lenders.
Taking out a 30 year loan term instead of a 25 year loan term will mean you have lower monthly repayments, but you will end up paying more interest over the life of the loan. Most borrowers choose 30-year loan terms for this reason.
25 year home loan vs 30 year home loan
A 5 year difference may not seem like a lot, but it can make a big difference:
Loan details
25 Years
30 Years
Loan amount
$300,000
$300,000
Interest rate
6.70% p.a.
6.70% p.a.
Monthly repayment*
$2,063
$1,936
Total interest payable
$318,982
$396,900
Interest saving
$77,918
* based on monthly, principal and interest repayments
In this example, the choice of a 25 year home loan length costs the borrower an extra $127 per month compared with a 30 year loan, but it also saves the borrower a staggering $78,000 over the life of the loan.
Even if you have a longer loan term, you may be able to make additional repayments or make use of repayment strategies which decrease your loan term. Making additional repayments or lump sum payments, or splitting your monthly loan repayment into fortnightly payments can see you pay your loan off in a shorter time period. Be sure to check for early repayment fees though.
Refinancing mistake: refinancing to a lower interest rate and not adjusting your loan length
One mistake to avoid is refinancing to a cheaper interest rate and taking out a new 30 year term. This can erode your refinancing savings, as you can see below.
-
Original loan
Refinancing after 10 years
Loan value
$800,000
$668,037
Loan term
30 years
30 years
Interest rate
6%
5.50%
Total principal and interest to pay
$1,726,706
$1,365,495 (+ the $574,968 already paid during the first 10 years)
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.
* based on monthly, principal and interest repayments
Using an offset account to cut down interest
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.
Marc Terrano is a lead publisher and growth marketer at Finder. He has previously worked at Finder as a publisher for frequent flyer points and home loans, and as a writer, podcast host and content marketer. Marc has a Bachelor of Communications (Journalism) from the University of Technology Sydney. He’s passionate about creating honest and simple reviews and comparisons to help everyone get value for money.
Refinancing your home loan can get you a better interest rate, adjust your loan term and take advantage of new features, but there are some things to look out for to make sure it's the right decision for you.
Home loan cashback deals can help you refinance to a cheaper interest rate and get a lump sum cash payment. Compare the latest deals and check your eligibility today.
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