How Long Should My Home Loan Be?

loan repaymentThe length of your home loan is important because the longer the loan repayment term, the more interest you pay over time.

Your home loan term has a direct impact on the interest you pay and the size of your repayments.
The longer the term is, the lower your repayments will be over time, but the more interest you'll pay. This is because your loan spans over more years.

Conversely, the shorter your loan term, the higher your repayments will be. However, you'll pay less interest over time.

New flexibility in length of home loans

Refinancing is an area where your loan term needs to be properly considered.

We have come a long way since the days of the inflexible 30 year mortgage. Today, if you want to refinance to home loan with a length of 12 years and 3 months, most lenders should have the flexibility to accommodate this. This change requires customers to change their mindset of what is possible and start demanding a tailored loan term to their specific needs.

Length of mortgage comparison

To show simply the sharp difference a loan term makes to the total interest you'll pay over the life of a mortgage, let's compare a 25 and 30 year mortgage.

Loan details 25 Years 30 Years
loan amount $300,000 $300,000
interest rate 6.70% p.a. 6.70% p.a.
monthly payment $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 does cost the borrower an extra $127 per month (which may push a 25 year length beyond the reaches of some people) compared with a 30 year loan, but it also saves the borrower a staggering $78,000 over the life of the loan.

Clearly the shorter the loan length, the less borrowers will pay in interest.

As you can see, this is because a 25 year loan term works in the same way as making additional repayments. Because your loan term is shorter, your repayments are calculated to be higher than with a 30 year loan term. As we know, higher repayments pay off more of your principal sooner and a lower principal means less interest is payable.

On the other hand, a 30 year loan term has lower repayments, as you now have five additional years to pay off what is the same loan amount. This of course means you also get charged interest for five extra years.

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.

Choosing to take out a home loan with a 40 year term will have even lower repayments than a 30 year loan term—$1,805.20 on $350,000 loan with a rate of 5.50% compared to $1,987.26 with a 30 year loan term, or $2,149.31 on a 25 year loan term. It’ll also come with a much larger interest bill—$516,496 vs $365,413.60 on a 30 year loan.

Remember that just because your loan term is longer doesn’t necessarily mean you can’t 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 than what you’ve agreed to anyway.

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 just accepting the default loan term, say 30 years. Tim already had a 30 year loan for five years, Tim should consider adjusting his new loan term to 25 years — to account for the five years the loan has already been paid for.

Tim refinances to a new home loan Original loan Refinance after 5 years
loan term 30 years 30 years (which means a real overall loan term of 35 years)
loan amount $300,000 $281,470
interest rate 6.70% p.a. 5.70% p.a.
monthly payment $1,936 $1,634
total interest payable $396,900 $404,266 ($306,645 in interest from the point of refinancing)
interest saving $7,365

* based on monthly, principal and interest repayments

Tim has made a smart move for his financial situation, switching to a home loan with an interest rate that is a full one percent cheaper than his original home loan — but he has made an error. He refinanced and started a new 30 year loan term even though he had already paid a full five years off his original mortgage. Refinancing will cost home $7,365 more in interest and will take him 5 years longer to be debt free.

A tip is to use your original loan term and years you've been paying off your home loan when deciding on a new loan term when refinancing.

If Tim had chosen a 25 year loan term when he refinanced, he would have saved himself $52,074 in interest over the life of the loan.

Compare refinance home loans today

Rates last updated August 22nd, 2018
$
Loan purpose
Offset account
Loan type
Your filter criteria do not match any product
Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
UBank UHomeLoan Variable Rate - Discount offer for Owner Occupiers, P&I Borrowing over $200,000
3.59%
3.59%
$0
$0 p.a.
80%
Enjoy flexible repayments, a redraw facility and the ability to split your loan. Plus, pay no application or ongoing fees.
loans.com.au Essentials - Variable (Owner Occupier, P&I)
3.64%
3.66%
$0
$0 p.a.
80%
A simple mortgage with a competitive interest rate and no application or monthly fees. Borrow up to $2 million from a convenient online lender.
Tic:Toc Live in Loan Variable Rate - Principal & Interest
3.64%
3.65%
$0
$0 p.a.
80%
Low interest rate and limited fees. Add a 100% offset account for $10 a month.
Greater Bank Ultimate Home Loan - Discounted 1 Year Fixed LVR ≤90% ($150K+ Owner Occupier)
3.49%
4.57%
$0
$395 p.a.
90%
Loans over $150k get a discount off an already low fixed rate. Available for NSW, QLD and ACT residents only.
ME Flexible Home Loan With Member Package - LVR <=80% $400k up to $699,999 (Owner Occupier, P&I)
3.69%
4.11%
$0
$395 p.a.
80%
Unlock a range of savings with this competitive package home loan offer. Offset account and redraw facility included.
Virgin Reward Me Variable Home Loan - LVR <= 80% ($500k to $750k Owner Occupier, P&I)
3.68%
3.82%
$0
$10 monthly ($120 p.a.)
80%
Earn Velocity Frequent Flyer Points with this mortgage to spend on flights and more (subject to eligibility requirements). Redraw facility available on this variable rate home loan. Competitive interest rate.
ClickLoans The Online Home Loan - LVR <70%
3.70%
3.70%
$0
$0 p.a.
70%
Get a discount for keeping your LVR at 70% or below with this innovative online lender.
Mortgage House Advantage Variable Home Loan COMBO - Owner Occupier 70 (Special)
3.64%
3.79%
$0
$10 monthly ($120 p.a.)
70%
Low rate, low fee loan for owner-occupiers. You will need a 30% deposit to get this mortgage.
Bankwest Complete Home Loan Package Fixed - 2 Year Fixed Rate LVR <90% (Owner Occupier, P&I & $200k+)
3.88%
4.40%
$0
$395 p.a.
90%
Lock in a very competitive 2 year rate and get package discounts on your credit card and offset account.
Newcastle Permanent Building Society Premium Plus Package Home Loan - New Customer Offer ($150k+ Owner Occupier, P&I) Discount 1
3.72%
4.10%
$0
$395 p.a.
80%
New borrowers or refinancers can get a discounted rate with this package loan. Bonus $1,500 cashback for refinancers.

Compare up to 4 providers

Image: Shutterstock

Marc Terrano

Marc Terrano is a content marketer manager at finder. He's been writing and publishing personal finance content for over five years and loves to help Australians get a better deal.

Was this content helpful to you? No  Yes

Related Posts

Home Loan Offers

Important Information*
UBank UHomeLoan Variable Rate - Discount offer for Owner Occupiers, P&I Borrowing over $200,000

Take advantage of a low-fee mortgage with a special interest rate of just 3.59% p.a. and a 3.59% p.a. comparison rate.

loans.com.au Essentials - Variable (Owner Occupier, P&I)

A competitive interest rate home loan with interest only options. Interest rate 3.64% p.a.
comp rate of 3.66% p.a.

Greater Bank Ultimate Home Loan - Discounted 1 Year Fixed LVR ≤90% ($150K+ Owner Occupier)

Loans over $150k get a discount off an already low fixed rate. Available for NSW, QLD and ACT residents only.

Newcastle Permanent Building Society Premium Plus Package Home Loan - New Customer Offer ($150k+ Owner Occupier, P&I) Discount 1

New borrowers or refinancers can get a discounted rate with this package loan. Bonus $1,500 cashback for refinancers.

Ask an Expert

You are about to post a question on finder.com.au:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com.au is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Privacy & Cookies Policy and Terms of Use, Disclaimer & Privacy Policy.
Ask a question
Go to site