How Long to Repay Home Loan
Buying a home is no small undertaking. You will have to commit years and even decades to pay off the mortgage, and along the way there will be considerations for upsizing, downsizing or renovating. Most home buyers in Australia are interested in knowing about how long home loan repayments will be because let’s face it, it’s a big financial commitment. And with this commitment comes the ongoing investigation as to how interest rates affect repayments and whether it’s time to consider refinancing if your bank won’t negotiate on rate. One of the critical decisions you need when applying for a home loan is determining how long you want to take to pay off that loan.
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How many years is ideal for a home loan?
Paying off the mortgage earlier means taking off that huge financial load much faster However, that could mean higher monthly repayments which won’t be ideal for every one,and how interest rates affect your plans.
The most common loan term for mortgages in Australia are for 30 years. The maximum term offered is up to 40 years, but as much as possible, aim for a shorter term to pay less interest and complete the repayments faster.
Figuring out how long you want to be tied to your mortgage isn’t just about picking a random number of years. It involves considering factors like interest rates, monthly payments, your own financial situation, and your long-term financial objectives.
By finding that sweet spot, you’ll be on track while enjoying some financial flexibility with your mortgage repayments.
How do I decide how long to repay home loan?
It’s good to pattern your mortgage with your normal income and outgoings, especially if you have a steady source of income. So which one should you choose: a shorter loan term with a higher interest rate, or a longer loan term with a lower rate? It depends on your financial setup and goals.
Let’s take a look at each option:
Going for a shorter loan term means:
- Faster loan repayment – A higher-interest rate typically leads to larger monthly repayments, which helps pay off the mortgage in a few years. Or can additional savings be used as a “buffer”for unexpected costs.
- Potential interest savings – You may pay less in total interest on the principal you borrowed over the span of the loan compared to having a 30-year loan term.
But think about:
- Qualification challenges – Securing a loan with a shorter loan term may be harder for some home buyers because lenders look at debt-to-income ratio, deposit amount, and repayment capacity before approving the loan.
- Increased monthly payments – Once approved, shorter loan terms often result in larger monthly payments that can strain your budget. Think about whether you can comfortably shoulder the mortgage amount.
- Impact on cash flow – The higher monthly payments may limit your available cash for other financial goals or unexpected expenses.
Going for a longer loan term means:
- Lower repayments – Making fortnightly or monthly repayments is more achievable and provides more breathing room in your budget.
- Improved cash flow – Lower mortgage repayments free up cash for other expenses, savings, or investment opportunities.
- Flexibility – Longer loan terms make it easier to manage your finances in case of unexpected circumstances beyond your mortgage concerns.
But think about:
- Higher interest paid overall – By extending the loan term, you are paying more in total interest over the life of the loan compared to a shorter term.
- Longer debt obligation – Agreeing to a longer loan term means more years before you become debt-free and take full ownership of your property.
- Impact on future financial goals – Extending the loan term may affect your ability to achieve other goals, such as saving for retirement or funding education.
Should I make extra mortgage repayments?
Getting ahead of your home loan responsibilities means prioritizing repayments. Many of the wiser folk among us treat their mortgage as if they have higher interest rates so that when you make repayments, each one is already at a higher rate.
Of course, this may not be possible with the interest rates now rising continuously. But when rates go down, repaying at a higher rate will help you make strides in completing your mortgage payments sooner.
Talk to us about home loan repayments
Ultimately, the decision should be based on your personal choice and financial priorities. You can consult with Intellichoice loan specialists about how to decide. If your main focus is paying off the loan quickly and minimizing total interest paid, there are loan products that will align best with your needs and objectives. Consult with our mortgage professionals today.
