Most home loans have 35-year repayment schedules, and for most people, this will be their biggest financial investment. Make sure you understand what you’re getting yourself into before taking the plunge. The Real Estate Agents Donnybrook will go over everything you need to know about house loan repayments and give you some advice on how to lower them.

What is a home loan repayment?

A house loan repayment is a pre-determined sum of money paid to your lender in monthly instalments to repay monies borrowed to purchase a home. Home loan repayments should be completed within the agreed-upon duration, which can range from 10 to 30 years and include the principal (amount borrowed) and interest (a fee charged by the lender for borrowing funds).

Are there different types of repayments?

Your repayments may be either principal and interest or interest only, depending on your loan type and terms.

Paying principle and interest (P&I) involves repaying both the loan and the accrued interest levied by the lender.

Interest-only (IO) repayments are exactly what they sound like: you’re only paying the interest your lender charges on your loan, not the loan itself. You’ll only be able to do this for a certain amount of time before your lender requires you to start making full principal and interest payments.

While you cannot escape paying interest on your house loan, there are several options for doing so:

Fixed interest implies you’ll pay the same amount of interest each month for a certain length of time if you fix your interest rate. This is useful for budgeting, but rate reductions will not help.

Variable interest: If your loan is structured at a variable rate, your monthly payback amount will fluctuate depending on your lender’s interest rate and the Reserve Bank of Australia’s cash rate movements.

Split rate: A split rate allows you to pay a fixed rate on part of your loan and a variable rate on the rest. This option allows you to have the best of both worlds.

How often should I make a home loan repayment?

The frequency with which you make payments is determined by the terms of the loan. They are usually paid in fortnightly or monthly instalments. The due dates for your payments, as well as the minimum amount you must pay, should be specified in your home loan contract.

Because interest is computed daily, making more frequent repayments, such as weekly or fortnightly payments, will minimise the amount of interest you pay over the life of your loan. Setting up a direct debit account with your bank or lender is the simplest way to make a home loan repayment. You may also be able to make scheduled repayments via phone or online banking without the funds being regularly debited from your account. Otherwise, you could go straight to the bank or lender.

What happens if I miss a home loan repayment?

In most cases, your lender will allow you to make up for missed payments. However, you should be careful that taking out further loans or using other forms of credit, such as credit cards, to make these payments will only result in you getting deeper into debt.

If you’re having trouble meeting your payback commitments, you might want to consider seeing a financial planner assist you in better balancing your budget.

Can I increase or decrease my home loan repayments?

Depending on the sort of loan you have, you may be able to make extra payments to help you pull ahead and pay off the loan sooner, saving money on interest. With a variable rate mortgage, you can normally make extra payments whenever you choose without facing a fee from your lender. 

Lenders may allow you to temporarily reduce your payback amounts or take a repayment holiday,’ in which you are exempted from making home loan repayments for up to 12 months, depending on the circumstances. Going on maternity leave, migrating from one job to another, needing to take leave due to illness or injury, or a loss in the family are all situations in which you may be allowed to reduce your repayments for a period of time.

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