Pick a Winning Loan Term
Choosing the right term for a home loan can save borrowers thousands of dollars in interest charges; but with scores of loans out there it’s hard to pick a winner.
Loan Market mortgage broker Josh Gilbert said that the most popular loan term was now 30 years, which is a shift from the pre-GFC trend of 25 years. However lenders have been responsive to the demands of different borrowers and terms of 15 to 40 years are now available.
“Loan terms are just a guide to set your repayments. Ultimately with a variable loan, the borrower is in full control of the loan term by making extra repayments at their own leisure,” he said.
“Both shorter and longer loan terms are popular with borrowers who can match their repayment amounts to their financial goals and unique situations that can often quickly change,” he said.
For borrowers looking for ultimate flexibility, it’s often beneficial to take on a 30 year term and aim to repay the loan in a much shorter time frame. This strategy gives home owners the comfort of being able to revert back to a minimum repayment level if they needed.
Mr Gilbert said that extended loan terms could be more beneficial for property investors who use the lower repayments for potential gearing advantages and shorter loan terms suited borrowers who have a healthy income with the goal to pay of their home loan as quickly as possible.
“On a 30 year loan term for a $300k mortgage your repayments are going to be about $40 a month less than a 25 year term, but you’re going to pay about $75,000 more in interest by taking 5 more years to pay off your home loan,” he said.
Mr Gilbert offered the following advice for borrowers considering different loan terms:
- Be committed to paying above and beyond your minimum repayment to ultimately reduce your loan term and therefore the interest you pay.
- Know that you can utilise the lower minimum repayment of a 30 year loan repayment if you’re forced to drop back to 1 income.
- If you are aiming to pay your loan off in 15 years. Keep your loan term at 30 years, knowing you can reduce your repayments if need be and make extra repayments when you can.
- A reduced loan term can build equity and savings faster in order to get your next investment sooner.