How long should my home loan be?
It's pretty straightforward: the longer the loan term is, the lower your monthly repayments will be. But what does that cost you in the long-term?
Key takeaways
- A 30-year loan means lower monthly payments but costs over $135,000 more in total interest.
- Avoid resetting to a new 30-year term when refinancing; it can significantly increase total costs.
- Use an offset account to reduce your home loan interest and shorten its overall term.
Length of mortgage comparison
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...
25 year home loan vs 30 year home loan - 6%
| Loan details | 25 Years | 30 Years |
|---|---|---|
| Loan amount | $600,000 | $600,000 |
| Interest rate | 6.00% p.a. | 6.00% p.a. |
| Monthly repayment* | $3,866 | $3,597 |
| Monthly extra cost | $268.51/m | $0 |
| Monthly extra cost over 25 yrs | $80,552 | $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 $268.51 per month compared with a 30 year loan. That adds $80,552 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 $80,552 more in monthly repayments, but saves you $135k in interest and saved payments. We have a clear winner!
- Even if you have a 30 year loan term, with most variable loans you can make additional repayments each month or lump sum payments here and there, which will decrease your loan term. Just check there's no fees for doing this.
Expert insight: Can you ask for a shorter loan term?
"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."
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 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 $213,757 more than you would have paid on the original loan.
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.
Finder survey: How many Australians understand how offset accounts work?
| Response | |
|---|---|
| Yes | 76.62% |
| No | 23.38% |
Source: Finder survey by Pure Profile of 1112 Australians, December 2023
Frequently asked questions about home loan terms
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