Home loan Tips with Money Matchmaker®

Home Loan fees & repayment options

Written by

Shaun McGowan
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Once you’ve secured a home loan and purchased a property, you’ll make regular repayments to your lender until you reduce the loan amount to zero.

Home loan repayment options

Most home loan repayments are made up of three key components:

  • Principal - The amount of money you borrow from your lender
  • Interest - Charged by your lender for borrowing money
  • Fees - Charged for the administration of your loan by your lender

The higher your principal, interest rate and fees are - the bigger your home loan repayments will be.

Loan term, or the period over which you’re required to repay your loan, is another key factor which can influence the cost of your repayments. The most common loan term is 30 years but they can vary from five to 40 years or more.

Home loan repayment terms vs total interest vs repayment amounts

Shorter loan termLonger loan term

Total interest paid over term

Lower

Higher

Monthly repayment amount

Higher

Lower

Principal and interest home loan repayments

Most home loans will be structured to include principal and interest repayments. This is often the simplest way to repay a home loan, as repayments reduce the principal amount while repaying any accrued interest. Usually, these loans will have a term of 25 or 30 years, after which the loan will be repaid and the principal reduced to $0.

Repayments may be higher than if you were to only make interest repayments, but your loan term will usually be shorter and you’ll pay less interest over the life of your loan. For the vast majority of borrowers, this is the most suitable option.

Principle and interest home loans

Principal and interest home loan repayments pros and cons

PROS

  • Pay reduced total interest over the life of the loan
  • Lower interest rate than comparable interest-only loans
  • Pay off your loan faster

CONS

  • Higher repayments 
  • May not have tax benefits for investors

Interest-only home loan repayments

Interest-only home loan repayments allow you to only pay interest on your loan for a set period of time - usually one to five years. This means you won’t make any repayments toward the principal and your loan amount will not decrease during the interest-only period.

Learn more about interest-only home loans.

Interest only Home loans

Interest-only home loan repayments pros and cons

PROS

  • Possible tax benefits for investors
  • Lower repayments for a set period
  • Ideal for bridging or construction loans

CONS

  • Higher interest rates
  • The principal amount doesn’t reduce
  • More interest payable over the life of the loan
  • Once the interest-only period expires, repayments will increase
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It’s important that you’re prepared for the end of the interest-only period of your loan. The increase in repayments catches some borrowers off guard and can lead to financial difficulty.

Working out the total cost of your home loan

When taking out a home loan you should always know its true cost. That includes:

  • The monthly repayment amount
  • The total interest payable

To give you an idea of how much your home loan might cost we’ve prepared the table below. As you can see, increasing your monthly repayment amount can significantly decrease the total interest paid and loan term.

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Home Loan 1Home Loan 2Home Loan 3

Home loan amount

$500,000

$500,000

$500,000

Term

10 years

20 years

30 years

Interest rate

2.49%

2.49%

2.49%

Comparison rate

3%

3%

3%

Monthly repayment amount

$4828

$2773

$2108

Total interest paid

$79,364

$165,517

$258,887

Home loan fees

The total cost of your home loan is mainly determined by your interest rate and loan amount, but fees can also cost you a chunk of change. Despite that, many borrowers aren’t aware of all the fees their lender is charging them.

To make sure you know the true cost of your home loan, check your loan’s product disclosure statement, which will include details of all fees.

When refinancing or applying for a new home loan you should always look at the comparison rate, not the interest rate. The comparison rate expresses the total cost of the home loan, including fees.

What are the fees and repayment options for home loans?

Home Loan Fees Amounts and Descriptions

Fee Average amountDescription

Application fees

$100 to $600

Covers cost of time reviewing the application.

Search processing fees

$50

Covers cost of time your lender spends performing title searches or other searches related to your application.

Monthly service fees

$15

Covers cost of time your lender spends on administrating your loan.

Annual fees

$400

Often charged as part of package home loans which include special discounts.

Late payment fees

$20

Charged for late payment.

Portability fee

$150 to $250

Charged to allow borrower to keep the same home loan while switching the property (i.e. when buying a new home)

Exit fees

Vary depending on home loan amount

If you took your home loan out before 1 July 2011 you may be charged a fee for exiting your loan (i.e. switching to another lender).

Early exit fees

$160 to $350

Charged if you pay your home loan in full within a specified number of years.

Discharge fees*

Average $255.04 and Maximum $1,068

Charged when you repay your mortgage in full.

Redraw fees

$50

Charged when a borrower uses a redraw facility.

Lender’s mortgage insurance

From $1,000 to $30,000+

A one-off cost charged by the lender to protect them in the event that the borrower can not make repayments. Usually only charged to borrowers with low deposits.

*Source: Canstar

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If a loan has a low interest rate and a high comparison rate that usually means it includes high fees.

If you can’t meet your home loan repayments

If you can’t afford to make your home loan repayments you can get help. Struggling to pay your mortgage can be stressful so remember to take care of yourself and always ask for help if you need it.

Here are your options:

  • Contact your lender and ask for a hardship variation. Your lender may agree to reduce your repayment amount until you can get back on track (some lenders are offering 6-month repayment holidays for borrowers affected by Coronavirus).
  • Seek independent financial advice. If you don’t already have an advisor you can use the free Financial Information Service provided by the Australian government.
  • Share your problems with friends and family. Even if they aren’t able to help financially, their support will be valuable.

It’s important that you stay in close contact with your lender during this time, and work with them to solve the problem.

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If you ignore the problem your lender will take the following steps:

Issue a default notice

This is a notice from your lender informing you of the overdue repayment and requesting that you pay that amount plus any usual repayments.

You should never ignore a default notice. If you can’t afford to pay, contact your lender and ask for help, and seek independent financial advice.

Serve you with a statement of claim

This is the start of legal action against you to reclaim the entire amount of the home loan. If you do nothing the lender can repossess your property.

Eviction

Your lender may get a court order to repossess your home. You will be evicted and your lender will sell your home to recoup their losses.

If your lender is not able to recoup the full amount of your home loan by selling your home you may have to keep making repayments.

How to pay off your home loan faster

When you own a home mortgage repayments take up a large proportion of your take-home pay. Paying your home loan off sooner will free up extra cash and give you more financial freedom, as well as reducing the total amount you spend on interest.

Making a few small changes to your home loan and repayments could help you make it happen.

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1. Increase your repayment amount

The most effective way to pay off your mortgage faster is to increase your monthly repayments. Paying as little as an extra $100 each month could save you thousands and shave years off your loan.

2. Switch to fortnightly repayments

Most home loan repayments are monthly by default. If you halve your monthly repayment and make it fortnightly, you’ll end up paying your loan off faster.

3. Make lump sum repayments

If you get a windfall, like a bonus at work or an inheritance, consider making lump-sum payments to your home loan. This could make a significant difference in the total cost of your loan.

4. Refinance for a better deal

Refinancing is a process where you take out a new home loan and pay off your old loan. The most common reasons for doing this are to secure a lower interest rate and/or fees, or to switch to a loan structure that’s more suitable.

Refinancing for a better deal can be a great way to reduce the costs of your loan and pay it off quicker. Learn more about how to refinance home loans.

5. Use an offset account

An offset account is a savings or transaction account linked to your home loan. When you link an offset account to your home loan interest is calculated on the home loan principal, minus whatever amount is in your offset account. This could help you reduce the interest payable and pay your loan off faster.

Use an offset account

Principal amount$500,000

Interest rate

3%

Loan term

30

Offset account balance

$100,000

Interest payable on

$400,000

Total interest savings over the life of the loan

$51,777

6. Use an advisor

Home loans can be complicated and confusing, but they needn’t be. If you need a hand making your home loan repayments and paying your loan off quicker, it’s a good idea to speak to an independent financial advisor.

They’ll be able to advise you on the most suitable loan structure and products for your situation, help create a budget to stick to and more.

Summary

Once you’ve secured a home loan and purchased a property, you’ll start making home loan repayments until you’ve paid the loan off.

Your repayments will be monthly or fortnightly and they’ll usually consist of three key components:

  • Principal repayments
  • Interest repayments
  • Home loan fees charged by your lender

The vast majority of home loans include principal and interest repayments, as this type of repayment enables you to reduce your loan principal and repay your loan over time.

You may opt for an interest-only home loan during new home construction, bridging finance or lifestyle changes. Investors may also choose to only make interest repayments due to tax benefits. However, this type of home loan can be risky and will not enable you to reduce the principal amount.

Fees are another part of every home loan that you should be wary of. Always refer to the comparison rate (interest rate + fees) when choosing a home loan, and check the loan’s product disclosure statement which should include details of all fees.

If you’re struggling to make home loan repayments know that there is help available to you, and never ignore your lender when they contact you to ask for repayment.

On the other hand, if you’re keen to pay your home loan off as fast as possible a few small changes could make all the difference. Increasing your repayments, refinancing for a better deal and using an offset account are just a few of your options.

Home loan fees and repayment options FAQs

What are home loan principal and interest repayments?

Your home loan’s principal is the amount your borrowed - interest is the fee charged by your lender. Most home loans require that you make both principal and interest repayments.

What if I can’t afford to pay my mortgage in Australia?

If you can’t afford to pay your mortgage seek financial advice and support immediately and contact your lender.

Your lender may reduce the amount of your home loan repayments to help you until you’re in a better financial position. In some cases banks may even allow a mortgage repayment holiday.

What is a mortgage repayment holiday?

A mortgage repayment holiday is a pause on your home loan repayments for a set period of time. During this time you will still be charged interest on your loan and your loan amount may increase as a result.

Usually, lenders only offer these to borrowers affected by exceptional circumstances, such as injury, illness or job loss due to an event like COVID19.

Can I make extra home loan repayments?

Yes, you can make extra home loan repayments. This is a great way to pay your home loan off faster and reduce the total amount of interest you pay. However, some lenders will charge you fees if you make extra home loan repayments if your loan has a fixed interest rate.

How can I pay my mortgage off faster?

There are several ways to pay your mortgage off faster. These include:

  • Making extra repayments
  • Halving your monthly repayment and making it fortnightly
  • Making lump sum repayments
  • Refinancing for lower fees and/or interest rates
  • Using an offset account.

Paying your mortgage off faster could save you thousands in total interest costs and give you better financial freedom later in life.

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About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.

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