A carefully structured loan enables you to maximise your interest savings and minimise the time it takes to pay off your loan. Michael Lee reveals the secrets to getting the structure right.

There are up to 26 different features or attributes that define the structure of a mortgage. That means there are up to 26 decisions that you will either make or have made that directly affect the financial cost of your mortgage, the safety it affords you and how much stress and time it takes to manage your loan.

Although it’s tempting to focus on interest rates as a starting point for comparing your mortgage options, an interest rate quoted on a website, in a magazine, newspaper or over the phone could be the nominal rate, headline rate, start rate, or comparison rate. Each is different and each includes a different, incomplete set of fees that the lender will or is likely to add to your loan.

More importantly, a loan with a ‘seemingly’ higher interest rate and better structure can easily outperform a loan with a lower rate. Saving 10% on your interest bill is outstanding. Getting debt free 10% faster as well? Priceless.

The good news is that you can do this without employing clever ‘tricks’, the wizardry of an offset account or questionable strategies sometimes promoted by lenders and brokers alike.

However, you do need to understand the structure decisions you will make when taking out your mortgage.

Factors to consider
The dictionary tells us that structure is a set of interconnecting parts of any complex thing. If you have ever performed a thorough analysis of loan options, or simply skimmed a loan contract, you understand that your mortgage is a complex thing.

Unfortunately, truly understanding and comparing mortgage structure is also complex. Life is busy enough and the concept of learning the ins and outs of home loans is probably too boring; too time consuming, or simply bamboozling.

To put it simply, here are some issues you need to know when choosing the right home loan structure for your particular situation.

1. Loan term
Loan term is the number of years it takes to repay your mortgage assuming you only ever make the minimum monthly, fortnightly, or weekly repayments. In recent years, as borrowers take on larger and larger loans, terms have stretched beyond the rather old fashioned loan term of 20 years.

Although terms of 25 years were common a few years ago, 30 years seems to be the new 25 and some lenders are even encouraging terms of 40 years. Yikes.

Lenders and mortgage brokers alike may encourage you to take your mortgage over a longer loan term. Although justification varies, common reasons include that a longer loan term reduces your minimum repayments, increases the amount you can borrow, or will make it easier to get your loan approved.

They often soften this by offering the opportunity to pay extra if you want to, the problem is that many people don’t. What they often fail to mention is just how much extra interest you will pay and how much more they are likely to earn by ‘stretching’ you to a longer loan term.

As a general guide, the decision to stretch your loan from 25 to 30 years reduces your repayments by just 6%, however, it increases your interest cost by 25% (based on a 15-year average of competitive rates, which is around 7.09%).

This means stretching your term from 25 years to 30 years for a $300,000 mortgage lowers your monthly repayment by just $124 a month, however, it will cost you almost $84,000 in extra interest.

As a general rule, you should always take the shortest possible term which delivers a payment amount that you feel is manageable. This payment amount should provide you with adequate protection against possible rate increases.

The pros and cons of taking a shorter loan term


  • You will become debt free sooner
  • Even reducing your loan term slightly can significantly reduce the interest that you pay
  • If you set your term too short, it can cause pressure when rates rise. Use historical rate information to make sure you aren’t setting yourself up for payments that may take you beyond your comfort zone when rates rise. However, most reputable lenders will allow you to re-amortise your loan and/or switch temporarily to Interest Only for just a few hundred dollars if you really need to.

Stretching your loan term


25 years

30 years


Loan payment


Interest cost


Interest cost

Monthly repayment difference

Total difference in interest cost





























Table 1 – Shows the lower repayment and increased interest cost when you, your lender or your broker stretches your loan term from 25 years to 30 years.

2. Payment type
There are two Payment Types available, ‘Principal and Interest’ (sometimes called P&I); and ‘Interest Only’ (IO).

Interest is the main fee lenders charge for use of borrowed money, principal is the debt – the actual money you have borrowed.

P&I is where you are required to repay a part of your debt with each regular payment as well as the interest for that period.

Interest Only, as the name suggests, means you are not required to pay off any part of your debt, you simply pay the interest for that period. Sensibly enough IO payments are lower as they do not include the additional amount to help repay your debt.

However, what many people overlook is that you have a larger debt for longer, which means you will pay more interest. What’s more, if your loan switches to P&I after a certain period (say five years), then your P&I payment will also be higher than if you took P&I from the very beginning, because you have a shorter time to repay the debt.

Like stretching your loan term, you may be encouraged to take your mortgage with an IO payment type. Again, the justification may vary, but the most common reason is that IO reduces your minimum payments. This is usually pitched at investors (backed up by the friendly reminder that interest is tax deductible), first home owners to ‘give you time to settle in to your loan/home’ or debt consolidators to boost claimed ‘savings’ on payments.

Unless you are a financially disciplined individual, IO payments are a significant obstruction to repaying debt. You can usually take IO for terms from one year up to the full life of the loan (called an ‘Evergreen’ Interest Only facility).

As a guide, and using the 15-year average rate of 7.09%, the decision to take an IO type on an Evergreen facility reduces minimum monthly repayments by around 14%, although it increases your overall interest bill by 50%.

This means taking an Evergreen interest only facility for 30 years (but keep in mind many lenders will only go to 25 years for this type of loan) on a $300,000 mortgage lowers your monthly repayment by around $242 a month, however, it will cost you almost $213,000 in extra interest.

Of course, shorter IO terms will reduce the cost, however, the underlying problem of paying more for interest for small reductions in monthly repayments still applies.

As a general rule you should pay P&I whenever possible.

The pro’s and cons of taking P&I payments

  • You are required to repay your debt, so you definitely will
  • The principle component of your payment starts small, but gathers momentum quickly
  • You will wind up paying a lot less interest
  • Your equity grows more rapidly
  • Payments are slightly higher, so if you have a mixture of personal debt and investment debt, you may take IO on your investment debt to allow you more money to accelerate repayment on your personal debt

The costs of different payment types



Principal and interest

Evergreen interest only




Interest cost


Interest cost

Monthly payment difference

Interest cost





























3. Rate type
Like many of the decisions around structure, you only really have two options when it comes to rate type, which are either a variable or fixed. As their names suggest, variable rates will go up and down from time to time, fixed rates won’t although, keep in mind that all fixed rates will turn into variable rates at the end of your fixed rate period (up to 15 years).

Generally speaking, fixed rate types will wind up costing you more and will keep you locked in to your lender. However, they also provide you with more security and better control of your money, as you know for certain how much your payment will be each month during the fixed rate term.

Unlike most other loans you may have taken out from time to time, your mortgage involves a very large amount of money and a variable rate can have disastrous consequences if you haven’t set your repayment budget properly.

Competitive variable rates reached 9.62% in July August 2008 and have peaked as high as 9.90% in the past 15 years. Each peak was sustained for a number of months. Factoring these peaks into your budget will help you keep your cool when interest rates heat up.

A third option is to take your loan part fixed, part variable. If you are not sure whether to fix your rate, lenders and some brokers are likely to suggest half-fixed and half-variable. The reassuring advice is ‘you get the best of both worlds’.

If you are not quite ready to fix, consider staying variable, increasing your payments to what they would be if you took out a fixed rate and have your broker watch for fixed rate specials. This increases your equity, creating a redraw buffer for a rainy day, and positions you to take advantage of specials when they arise.

The 50/50 con
While it might sound tempting, it is the lender and the broker who gets the best of both worlds, not you. The fixed half, which is often at a higher rate, anchors your whole loan with them no matter how well they look after you. It strips away your flexibility to vote with your feet. At the same time, if rates increase, your repayments also increase. This strips away repayment certainty, which is the only advantage of a fixed rate loan.

Loan features


Loan features Directly affects lender and/or mortgage broker earnings? Significantly impacts
1. Term Yes Affordability and overall cost
2. Loan amount Yes Affordability and overall cost
3. Nominal interest rate Yes Affordability and overall cost
4. Rate type Yes Overall cost and security
5. Establishment fees Yes Overall cost
6. Ongoing fees Yes Overall cost
7. Discharge fees Yes Overall cost
8. Penalties or deferred establishment fees Yes Overall cost
9. Payment type Yes Affordability and overall cost
10. Interest only term Yes Affordability and overall cost
11. Repayment frequency Yes Your ongoing time investment
12. Rebates Yes Affordability and overall cost
13. Product type Yes Affordability and overall cost
14. Additional payments Yes Overall cost
15. Redraw Yes Overall cost and your ongoing time investment
16. Offset facility Yes Overall cost and your ongoing time investment
17. Interest in advance Yes Overall cost
18. Lender type Yes Security and your ongoing time investment
19. Split loan facility No Overall cost, security and your ongoing time investment
20. Internet/phone banking No Overall cost and your ongoing time investment
21. ATM/Eftpos access No Overall cost and your ongoing time investment
22. Branch access No Overall cost and your ongoing time investment
23. Direct deposit No Overall cost and your ongoing time investment
24. Loan purpose No Eligibility
25. Rate lock No Overall cost and security
26. Portability No Overall cost and your ongoing time investment

Re-amortisation is when you reset or extend the loan term to a longer period and is an unnecessary trick sometimes used by lenders and mortgage brokers to earn more from you in interest and commission. If you are refinancing, you should avoid re-amortising your loan unless you need to in order to meet your repayment obligations. If this sounds like you, contact a credit help line for debt management assistance before undertaking a refinance.

A final thought
Over the years, the mortgage feature list has grown and will continue to grow as lenders compete with each other for business. Information learned last year will be relevant, but outdated for a loan comparison this year and you can bet that many of the features will continue to make comparisons more difficult.

It is prudent to seek professional help from a person who really understands the mortgage market, takes the time to properly understand your situation and is working solely in your interest. Remember that up to 18 features influence the amount of money a lender or mortgage broker will make from you. Although lenders and brokers may appear to offer free help, you will always pay somewhere. An alternative is to retain a borrowers agent that does not accept payments from lenders and works exclusively for you.

Good advice quickly pays for itself and continues to deliver benefits throughout the life of your mortgage, whereas free advice is usually not free at all.
Michael Lee is the founder of KeyFacts. For more information go to www.keyfacts.com.au or email him directly at michael.lee@keyfacts.com.au. All the views expressed here are his own.