If you have a loan where you can choose the term, it’s important to do your sums first. The shorter the loan term, the less interest you’ll pay—but your repayments will be higher. If you choose a longer term (say, 30 years) your repayments will be less but you’ll pay more interest.
Belinda and Pete
Belinda and Pete want to move from their one-bedroom inner-city apartment to a three-bedroom house in the suburbs. They don’t just want more space, they’re going to need it when bub arrives.
Together, they earn $120,000. Their monthly expenses are around $3,000. If they borrow $700k over 30 years at a rate of 5.88% pa, their monthly repayments will be $4,143. But if they halved their loan term to 15 years, they’d pay $5,862.
So, they pay more in the short term, but they won’t pay anywhere near as much as they would in the long run. These are things to consider while you’re looking for a new loan.
Try your own calculations with our loan repayments calculator.
Interest only repayments
Australian Securities and Investments Commission has some useful information for customers interested in using an interest only repayment period as part of their loan term. Check out their MoneySmart guidance for some easy to follow infographics highlighting the pitfalls and benefits of this type of lending structure. You can also find examples of how much you may expect to pay for this type of loan structure.
We have a more detailed explanation and case study to help demonstrate the differences in our article interest only vs. principal and interest repayments.