According to the Australian Bureau of Statistics, the average owner occupier home loan size at the time of writing is more than $600,000 and tends to grow every month. Dividing that by the average home loan span of 30 years means you would be looking at paying more than $20,000 per year, plus any compounded mortgage interest in that time.
A loan of this size will likely represent the largest debt you will ever take on. But when dealing in such large repayments, that means small changes to your repayments could save you thousands.
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Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.04% p.a. | 6.06% p.a. | $2,408 | Principal & Interest | Variable | $0 | $530 | 70% | Featured Online ExclusiveUp To $4K Cashback |
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5.99% p.a. | 5.90% p.a. | $2,396 | Principal & Interest | Variable | $0 | $0 | 80% | Featured Apply In Minutes |
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6.14% p.a. | 6.16% p.a. | $2,434 | Principal & Interest | Variable | $0 | $250 | 60% | Featured Unlimited Redraws |
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Principal and Interest
When taking out a home loan you will undoubtedly hear the terms ‘principal and interest’, or P&I. The principal of your home loan is the amount of money you borrow.
The interest is the cost charged by the bank or lender to you to borrow this money. Usually, a lender will require a deposit of 20% of the property value you intend to buy to avoid Lenders Mortgage Insurance or LMI.
For example, a $500,000 house might require a 20% deposit of $100,000 to secure the home loan. Your lender would then let you borrow the remaining $400,000 (80%), which you then would repay over time. In this example, the principal would be $400,000.
Now that you have secured the home, your lender expects you to repay the principal, plus an amount of interest. That means your repayments each week/fortnight/month, would be paying off the principal with an added cost. This added cost depends on the product’s interest rate which can be fixed - meaning it stays the same, or variable - meaning it could rise or fall during the life of the loan.
Also read: Fixed and Variable home loans explained
P&I vs Interest-Only: How does this impact the life of the loan?
The reason principal and interest is important is because different home loans will have different interest repayments and different rules for when you begin to pay back the principal.
An interest only loan is a loan that delays the repayment of the borrowed amount (the ‘principal’) for a fixed term, usually between three and five years, but sometimes up to 10. During this time, you only have to pay the interest on your loan, not the principal. Investors might also be able to opt to pay interest-only in arrears, or upfront, which can have different benefits and drawbacks at tax time.
At the end of the set interest-only period, repayments change to paying off the principal as well as the interest, to what is known as principal and interest (P&I) repayments. Paying interest-only for a set period can draw-out the total life of the loan. However, some lenders restrict interest-only loan lengths to 25 years, which condenses the period you have to pay off the principal, making your mortgage repayments higher.
Repayment frequency
When setting up a home loan, the frequency of your repayments will also impact how long it takes to pay off the home loan. Repayments are usually monthly or fortnightly, however repaying fortnightly can help you pay off your mortgage years earlier and save you money.
Because there are 12 months in a year, but 26 fortnights and 52 weeks - fortnightly or weekly payments can help you make an extra month’s worth of monthly repayments each year.
Paying fortnightly vs monthly: Entire loan term interest savings
|
|
Monthly |
Fortnightly |
|
Repayments per year |
$19,959 |
$21,623 |
|
Total repayments (principal + interest) |
$598,783 |
$582,140 |
|
Total Interest cost |
$148,783 |
132,141 |
|
Total interest saved |
N/A |
$16,643 |
|
Time to pay off loan |
30 years |
26 years, 11 months |
|
Time saved |
N/A |
3 years, 1 month |
Source: Repayment Frequency Calculator.
How to get ahead on your mortgage
There’s a few ways you can shorten the length of your home loan, and ultimately how much interest you pay. Be sure to check if your lender has any early discharge fees.
Extra repayments
Many variable rate home loans will come with the option to make extra repayments, whereas fixed-rate home loans might not allow extra repayments or cap them to a certain amount.
Paying extra can reduce the life of the loan. If you are lucky enough to receive a pay rise, a bonus at work, or receive a sizeable windfall, using the money to get ahead on your home loan could yield benefits such as reducing interest paid over the life of the loan.
Paying off chunks of the principal reduces the amount you owe and with most loans, the less principal you owe, the less interest you’re charged. This will both reduce the life of the loan, and the interest you are paying off.
Refinance
Refinancing is when you move your home loan from one lender to another or to a new home loan with the same lender. Refinancing might be a good idea if you are:
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Paying too much in interest
-
Paying hefty fees
-
Unable to access offset or lump sum features
When refinancing to a lower interest rate, you don’t have to take on any extra debt – you can simply refinance the amount left to repay (the ‘principal’). This can also unlock equity in your home, however if you borrow against this equity you’re likely extending the life of the loan.
If you refinance to a loan with lower interest rates, or added features like lump sum repayments or more frequent repayments, you can reduce the length of your home loan and ultimately how much interest you pay. However before you do that, be aware of the potential costs of refinancing.
Monitor interest rates
Another way to reduce your loan and subsequently the length of your loan is to maintain your repayments even when interest rates drop. This may seem counter intuitive, but when you break it down, continuing with the same repayments even if interest rates fall means you will be taking bigger chunks out of the principal.
If you can, making the same repayment amounts as you always have, even if interest rates fall, will mean you’re chipping away at the principal amount, meaning less interest charged over time, and paying off your loan quicker in the long run.
Image by Ralph Kayden via Unsplash
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