Regarding the term of a mortgage. Is it better to have a longer term like 30 years rather than 25?
Q. My question concerns the term of a mortgage. Isn’t it better to have a longer term like 30 years rather than 25? This reduces the interest charged in the short term, so more of the principal can be repaid. And when is this a poor decision? At 30 years you’ve clearly paid five years’ more interest than with a shorter loan.
A. This is a very interesting question and got me running for my mortgage calculator!
Taking the example of a $200,000 loan at 8% interest the following facts emerge:
Making minimum repayments over 25 years of $1,543.63, the loan is repaid at a cost of $263,433.72 in interest. The same loan over 30 years requires minimum repayments of $1,467.53 and cost a total of $328,932.10.
Clearly, the shorter term is better and saves you money because you are paying more each month. However, in my view it is preferable to take the 30 year term. This provides you with maximum flexibility. If you can afford to make repayments calculated on a 25 year or lesser loan term then my advice is to be disciplined and make those extra repayments. This will repay your home loan faster, save you interest and also provide you with a safety net – the extra payments you make can generally be accessed as redraw should you require funds for any reason.
Related: Home Loan Calculator