Home loans typically come with repayment terms of up to 35 years, and for most people this will be their largest financial investment. Before you make the leap, make sure you know what you're letting yourself in for. Here we break down everything you need to know about home loan repayments and share tips on how you can reduce them.
A home loan repayment is a pre-agreed amount of money paid, in regular installments, to your lender in order to repay funds you borrowed to purchase a property. Home loan repayments should be made in full within an agreed timeframe, which can be anywhere from 10 to 30 years and are made up of the principal (the amount borrowed) and interest (a fee charged by the lender for borrowing funds).
For example, if Jack and Jill have a loan of $400,000 to be repaid at a rate of 3.69% over a 25 year loan term, their monthly principal and interest repayments would be $2,043. If they chose to make interest only payments, they would pay their lender $1,230 per month.
Depending on your loan type and the agreed terms of your loan, your repayments may be principal and interest, or interest only.
Principal and interest (P&I): Paying principal and interest means that you are repaying the loan itself as well the accrued interest charged by the lender.
Interest only (IO): Interest only repayments mean exactly that, you are only paying the interest the lender charges on your loan and not the loan itself. You can only do this for a limited time before your lender will require you to begin making full principal and interest repayments.
While you can never avoid paying interest, there are different ways you can pay interest on your home loan:
Fixed interest: Fixing your interest rate means you will pay the same amount in interest each month for a set period of time. This is good for budgeting but you won't benefit from rate decreases.
Variable interest: If your loan is structured at a variable rate, your repayment amount can change from month to month based on your lender's interest rate and the Reserve Bank of Australia's cash rate movements. This is a gamble as you run the risk of paying more if the rate increases but can benefit from rate decreases.
Split rate: A split rate allows you to pay a portion of your loan at a fixed rate and the remainder at a variable rate. This option can give you the best of both worlds.
Learn more about split rate loans here.
How often you make your repayments will depend on the terms of your loan. Generally, they are made in either fortnightly or monthly installments. Your home loan contract should outline the times at which your repayments are due, as well as the minimum amount you are required to pay.
Home loan tip: Since interest is calculated daily, you can reduce the amount of interest you pay over the life of your loan by making more frequent repayments i.e. switching from monthly to weekly or fortnightly payments.
Keeping extra funds in an offset account can be a great way to help reduce the amount of interest you pay and as a result reduce your repayments. The money saved in the account “offsets” the amount you owe on your loan, and the loan essentially treats the balance in the account as part of your overall home loan repayment.
For example, if you have a $500,000 loan, and $20,000 in your offset account, you’ll only pay interest on $480,000. While this may not seem like much, this could help you save a significant amount of money on interest over the life of your loan.
Calculate how much you might save with an offset account in seconds.
Yes, refinancing to a loan better suited to your unique situation may help reduce your home loan repayments. Interest rates change all the time and if you took out a home loan 15 years ago when perhaps your credit history wasn’t so great and interest rates were higher, you may be paying more than necessary on your home loan.
Depending on your individual circumstances, refinancing may help you reduce your home loan repayments or pay off your loan faster. Speak to a Lendi Home Loan Specialist today for advice on refinancing and whether this is a sensible option for you.
The simplest way to make a home loan repayment is to set up a direct debit account with your bank or lender. You may also be able to use phone or internet banking to make scheduled repayments, without the money being automatically deducted from your account. Alternatively, you could visit the bank or lender directly.
Missing a home loan repayment is not the end of the world. Your lender will usually give you the option to catch up on your missed payments. It’s important, however, to be aware that you should try not to take out other loans, or use other forms of credit, like credit cards, to make these payments, as you’ll only find yourself in more debt.
If you do begin to find yourself struggling to meet your repayment obligations, you may need to consider speaking with a financial planner to help you better balance your budget. If it’s other bills - like water, gas or electricity - that are keeping you from being able to make your home loan repayments, you could try organising a better, more manageable payment plan for these services with your providers directly.
If you default on your repayments, you should be aware that you’ll likely be required to pay an additional fee for this, and additional interest as well. On top of this, these defaulted payments will show up as black marks on your credit file, which could affect your ability to receive a loan in the future.
In a tricky financial situation? Chat with a Home Loan Specialist for free expert advice on 1300 323 181.
First of all, it’s important that you seek legal advice if you find yourself in this situation. If you continuously miss your home loan repayments, you may be forced to default on your overall loan, at which point your lender may be forced to repossess your property in order to recover their losses.
This is the most extreme consequence, and your lender is required to make contact with you and give you plenty of notice and time to begin catching up on your repayments.
Before issuing a Statement of Claim, which is essentially a notification that they intend to repossess your property, they will first issue you with a Default Notice, which gives you at least 30 days to make the payments you’ve missed. If you do not sufficiently attempt to make these repayments, then the bank can begin taking legal steps to repossess your property.
For more advice on making home loan repayments and refinancing speak to a Home Loan Specialist today.
SmartPay is a third party tool offered by some banks and lenders on certain home loan products that allows you to deposit your income straight into a home loan account. You can then arrange regular transfers from this account to pay off bills or to simply move some of those funds into another account.
Depositing your income straight into a home loan account can help ensure you never miss a repayment and help save you money on interest. Knowing your income is directly going towards paying off your home loan can also help you curb your spending habits, and allow you to pay your loan off faster.
SmartPay is not a feature offered by all banks and lenders. Having your income directly deposited into your home loan account could be a hassle if you need to access your earnings for other purposes, such as paying utility bills or paying off other credit loans. This can be particularly problematic if your lender charges a fee for withdrawing too much or too often from the home loan account.
While some circumstances may permit you to get ahead with your home loan repayments, other unforeseen circumstances might impede your ability to make your home loan repayments. Either way, home loan repayments aren’t always set in stone, and sometimes there are ways to adjust your home loan repayment obligations.
Depending on your loan type, you may have the option of making extra repayments to help you get ahead and pay off the loan ahead of schedule, saving money on interest in the process.
With a variable rate home loan, you will usually have the flexibility to make additional repayments whenever you are able, without incurring a fee from your lender.
However, with a fixed rate home loan your lender may be less willing to allow you to make extra repayments. A fixed rate loan contract requires you to pay a specific, unchanging amount, regardless of interest rate fluctuations, usually for a period of 1-5 years. If your lender does allow you to increase your repayments, they might impose a fee, as this is essentially breaking the terms of your fixed rate contract.
Another option is to perhaps refinance to a split loan where you repay a portion of your loan at a variable rate and the remainder at a fixed rate. Speak to a Lendi Home Loan Specialist today to find out if you could save with a split loan.
Learn more about split loan repayments here.
Generally, your lender will require you to make a minimum repayment each week, fortnight or month.
Repayment holidays: Under certain circumstances, lenders may allow you to temporarily decrease your repayment amounts, or to take what’s called a ‘repayment holiday,’ in which you may be excused from making home loan repayments for a period of up to 12 months.
Situations in which you may be permitted to decrease your repayments for a certain period of time include going on maternity leave, transitioning from one job to another, needing to take leave due to illness or injury, or a death in the family.
Some lenders may require you to have made extra repayments in order to be granted a repayment holiday. Circumstances in which you might be eligible include being on maternity leave or being forced to take leave from work due to injury or illness.
Discuss options with your lender: If you are experiencing financial hardship, it is in your lender’s best interests to help you to ultimately make your repayments, rather than to allow you to default on your loan. If you have a legitimate need to temporarily ease up on your home loan repayments, consider speaking to your lender before you fall behind on your repayment obligations.
Refinancing to a lower rate: Another option you may wish to consider is refinancing. It may be that you are currently paying more on your home loan than you need to. Perhaps you took out a home loan at a time when interest rates were higher and your credit history wasn’t exactly pristine. Depending on your current financial situation and personal circumstances, it may be that refinancing could help you get a better rate on your home loan, and therefore decrease your loan repayments.
Want to reduce your monthly payments? Compare refinance rates in seconds with Lendi.
Depending on your loan type, your repayment history, and your personal circumstances, some lenders may allow you to take what is sometimes called a ‘repayment pause’ or a ‘repayment holiday’. This pause can last for 3 months, or sometimes even up to 12 months.
Repayment pauses may be given if you are taking legitimate leave from work, e.g. to have a baby or even to travel. To be eligible, some lenders may require you to have made extra repayments on your loan.
At the conclusion of the repayment pause, your lender will typically require you to make increased repayments going forward, to ensure you are still able to fully repay your loan within the agreed time frame.
For free expert advice on your specific situation, speak to a Lendi Home Loan Specialist today.
Put simply, a home loan offset account is a savings or transactional account that is directly linked to your home loan and is designed to help you reduce the interest on your loan. The balance is offset daily so the lender calculates your interest as if you’ve paid the extra savings towards your loan.
The more money you have in your offset account, the less interest you will pay which means you can own your home outright sooner.
Calculate how much you could save with an offset account.
The money within the account poses offsets the balance of your home loan. Depending on which type of offset account you choose to open, the money within the offset account is then taken away from the principal remaining on the loan, before the interest is then calculated.
For example, if you have a loan of $300,000 and $20,000 in an offset account, you’ll only pay interest on a loan of $280,000.
You can access the funds in the offset account as often as you like. If you take out $5,000, leaving $15,000 in the offset, your lender will then calculate interest on a loan of $285,000.
While this may not seem like much, this could help you save a significant amount of money on the interest you pay over the life of your loan.
Learn more about offset accounts here.
A redraw facility, or redraw account, is a feature offered by some lenders usually with variable rate home loan. If you make extra repayments on your home loan, a redraw facility allows you to access these extra funds should you need to.
Making additional repayments on your home loan can allow you to pay less in interest and, of course, pay the loan off faster.
If you find yourself in a financial emergency, a redraw facility can allow you to withdraw those extra funds at a later time.
You can get ahead on your home loan, and also be reassured that the extra payments you’ve made are still accessible if you need it.
A downside to having a redraw facility is that your lender may charge you a fee to withdraw those extra funds, and also impose limits on how much and how often you can access them.
Some lenders may allow you to withdraw funds a certain number of times without charge, others might require you to withdraw a minimum amount each year. These fees and conditions will vary depending on your lender.
To ensure you have the most flexibility in terms of your needs, it’s important to know just how you’re going to be using that redraw facility before you sign up for one.
To set up either a redraw facility or SmartPay, you will need to speak with your lender. It is important to discuss your options and your intentions thoroughly before proceeding, in order to avoid paying unnecessary fees or losing track of your repayments.
Want free expert advice? Chat to a Home Loan Specialist today.