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Can I shorten my home loan term?

By ,| 4 min read

When you buy a home, it’s common to set and forget your home loan.

But your financial situation and needs can change as the years go by and the home loan you first took out might not be the best for you anymore.

Refinancing your home loan can help you get a better deal. In this article, we explain how refinancing to a shorter loan term can save you money on your mortgage. We also provide tips on how to pay off your home loan faster.

What’s my home loan term?

Your home loan term is the length of time you have to pay off your home loan. A home loan term is typically 25 or 30 years.

The amount of time you actually take to pay off your loan can differ from your loan term.

For example, you might make extra repayments over the course of your 25 year loan and pay it off after 22 years instead. Or, you might experience financial hardship and extend your loan term to lower your mortgage repayments.

Usually, with a longer loan term, your monthly repayments will be smaller, but you’ll pay more in interest over time.

On the other hand, a shorter loan term usually means your repayments will be higher, but you won’t pay as much interest over the course of your loan.

Let’s use an example to see how this works.

Say you have a $450,000 home loan with a term of 30 years and an interest rate of 3.9%. Your monthly repayments would be $2,123 and you’d pay $314,280 in interest over the 30 years of the loan.

If you cut this loan term to 25 years but kept the home loan amount and interest rate the same, your monthly repayments would be $2,350. But, you would pay $255,000 in interest over the full 25 years.

So, while a shorter loan term might increase your monthly repayments slightly, it could save you tens of thousands of dollars in interest over the life of your mortgage.

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Can I refinance to reduce my loan term?

If you like the idea of saving money in interest and paying off your home loan faster, you might be thinking about reducing your loan term.

Refinancing your mortgage is one way to do this.

There are many reasons why borrowers refinance. Maybe you want to access the equity in your home to fund renovations, or perhaps your current loan doesn’t suit your needs anymore.

Whether you choose to refinance your loan with your current lender or with a different lender, there are a few things to be aware of before you refinance to shorten your loan term:

  • Check your eligibility to refinance: typically, you’ll need to have a Loan to Value Ratio (LVR) of at least 80%, a reliable repayment history and a good credit score to be eligible to refinance. A Home Loan Specialist or a mortgage broker can help assess your suitability to refinance before you apply
  • Consider the costs of refinancing: refinancing can come with costs like break fees (if you are ending your fixed interest rate term early), application fees, discharge fees and lender valuation charges. It’s worth taking these into account before you make the switch
  • Prepare for higher repayments: while shortening your loan term might be financially beneficial in the long term, your monthly repayments will still increase when you refinance. It’s important to be realistic about what you can afford, and how this fits in with your current expenses
  • Review the loan in its entirety: while a loan with a shorter term and a lower interest rate might be enticing, it’s a good idea to make sure it will have all the features you need, like an offset account or a redraw facility.

Always make sure you double check the loan term of the mortgage you are refinancing to. If you roll onto a higher loan term by default, you could end up paying more on your home loan than necessary.

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More ways to pay off your home loan faster

1. Change your repayment frequency

Upping your repayment frequency can help you pay off your home loan more quickly.

Most lenders calculate interest daily, so the idea is that more frequent repayments can shave time off your home loan.

If you repay your home loan monthly, you’ll make 12 repayments in a year. However, if you repay your home loan fortnightly, you’ll make 26 repayments a year. This means you essentially make an extra month’s repayment when you pay back your loan fortnightly.

2. Make extra repayments

Making extra repayments can cut years off your mortgage.

Whether you make regular additional repayments or only put extra cash (maybe from a tax refund or work bonus, for example) towards your home loan on occasion, it can make a difference.

Extra repayments pay off the principal portion of your loan, meaning there is less balance remaining for interest to be charged on.

Ensure you check before making extra repayments towards your home loan. Some loans, like fixed rate loans, don’t allow unlimited extra repayments. Typically, variable rate home loans do.

3. Continue making the same repayment amount even if you switch to a lower interest rate

If you refinance your home loan to one with a lower interest rate, it could be a good idea to keep your repayments the same.

So, instead of accepting the reduced repayment amount when your interest rate drops, keep your total repayment the same as when you had a higher interest rate.

This way, you’ll pay off more of your loan’s principal and pay your loan back faster.

Do you have questions about getting your home loan in shape? Lendi’s Home Loan Specialists are here to answer them. Book an appointment at a time that suits you.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: home loan, mortgage repayment, interest rate, refinance, loan term, extra repayments

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# Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.

Lendi is a privately owned and operated Australian business. Our mission is to change the way Australians get home loans by providing a faster, smarter and more secure home loan experience designed around the customer’s convenience and needs. Although Lendi compares over 1600 products (2,500+ products including feature and pricing variations) from more than 25 lenders, we don't cover the whole market or compare all features and there may be other features or options available to you. Lendi Group Pty Ltd, which is the ultimate holding company of the Aussie and Lendi businesses is owned by numerous shareholders including; banks such as CBA, 1835i (ANZ’s external venture capital partner) and Macquarie Bank, the Lendi founders and employees, and a number of Australian institutional investors and sophisticated investors including UniSuper.

*WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years. Fees and charges apply. All applications are subject to assessment and lender approval. Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.

IMPORTANT INFORMATION: Loan terms of between 1 Year and 40 Years are available subject to lender and credit criteria. Maximum comparison rate will not exceed 14.99% (see comparison rate warning above). Any calculations or estimated savings do not constitute an offer of credit or a credit quote and are only an estimate of what you may be able to achieve based on the accuracy of the information provided. It doesn't take into account any product features or any applicable fees. Our lending criteria and the basis upon which we assess what you can afford may change at any time without notice. Savings shown are based on user inputted data and a loan term of 30 years. All applications for credit are subject to lender credit approval criteria. Top rates include lenders who are on our panel and are then defined by the circumstances provided by the borrower.

The Lendi Group Pty Ltd, which is the ultimate holding company of the Aussie and Lendi businesses is owned by numerous shareholders including; banks such as CBA, 1835i (ANZ’s external venture capital partner) and Macquarie Bank, the Lendi founders and employees, and a number of Australian institutional investors and sophisticated investors including UniSuper.

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