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If You Could Save $67,383 in Five Years, Would You?

By Silvia Wei

That’s the real decision you could be making when it comes time to choosing the payback term of a home loan of $500,000.

Caught up in the excitement of purchasing a new home, few of us give much thought to whether the loan term should be 25 or 30 years. After all, it’s easy to believe that a few years here or there won’t impact significantly on the overall cost.

One of the clear advantages of the longer term 30-year loan is lower monthly repayments.  More time to pay means spreading the amount owed over an extended period. Consider this, if you choose a longer 30-year term on a $500,000 home loan your weekly repayments will be roughly $550.00.  Your 25-year term weekly repayments will be $609.  That’s a saving of $59 per week, or $255 per month, which may be appealing and certainly may help your cash flow and make for more comfortable mortgage repayments [source].

How loan terms compare: 25 vs 30 years

Let’s do some figures on the life of your loan to see what an extra five years really mean.

Any increase in the loan term means a corresponding increase in the amount of interest you pay. So if you have a $500,000 mortgage at 3.99% interest, your total loan repayments over 30 years would be $858,311 with an interest amount of $358,311.

Take the same home loan and put it over 25 years and you will see a significant reduction in cost. Your total loan repayments would be $790,928, with an interest amount of $290,928 [source].

Let’s look at those savings.  By paying that extra $59 per week and paying your home loan off five years earlier, you will save $67,383.  That’s a nice renovation to your property, overseas travel or a nest egg for later years.

It’s certainly something to think about.  As your mortgage broker, we can help you run some sums before making this decision. Taking the time to make a considered choice could make a significant financial difference but be sure to seek expert advice to assess the pros and cons for your individual circumstance.

Source:Money Warehouse

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