Mortgages

Mortgage repayments in Australia, all you need to know

Toni Mladenova
Dec 10, 2020

Table of Contents

Before you start checking out the real estate ads for your dream home, it helps to understand the financial obligations like mortgage repayments that come with owning a home. You will want to know how mortgage repayments work, how much they will be and how you might be able to save.

Mortgage repayments are different for every home loan because they are dependent upon the choices you make around your loan, such as:

  • The total loan amount and duration.
  • The interest rate and whether you have an offset account to lower your interest through savings.
  • Are you fixing your interest rate or opting for a variable or maybe you decide to split the loan between both?
  • Are you repaying your principal and interest or are you looking at an interest-only loan (this may not be possible depending on your personal circumstances)?
  • What repayment frequency are you choosing and are there other fees you also need to pay off within your loan?

This guide will help you get a fuller understanding of how your mortgage repayments will work.

Mortgage repayments: Understand the terms, how to calculate repayments and how to help ease stress

You may wonder "how will repaying a home loan fit into my budget" or "how long will it take me to repay the home loan". Understanding the basics of mortgage repayments will help you be better informed when looking for a home loan.

Defining standard terms used when discussing mortgage repayments

When researching mortgage repayments, there are some standard terms you will come across that you may not understand. Getting to know these terms will help you be better informed about the home loan process.

Principal

The principal is the loan amount or the total amount of money you have borrowed from the lender, it includes the cost of the property as well as any fees. These fees may include upfront fees relating to setting up your home loan or lenders mortgage insurance (LMI).

Interest

Interest is what you pay the bank or lender for lending you the money to buy your property. It will change depending on your interest rate and the total size of your home loan.

You generally have two options when it comes to the type of interest rate applied to your home loan, fixed or variable. A fixed interest rate is one that stays the same for a period such as 1, 2, 3 or 5 years. A variable interest rate can change at any time during your loan term.

Fees and charges

There is a range of fees and charges that lenders will charge when you take out a home loan. You may also need to pay lenders mortgage insurance (LMI) if you don't have sufficient deposit. Most of these fees can be capitalised into your home loan and therefore included in your mortgage repayments.

Loan term

The loan term is the agreed-upon timeline that you will repay your home loan. The standard loan term is 30 years, but you can ask to adjust this if you think you will be able to repay the loan sooner.

Although if you do adjust the loan term, this will impact your mortgage repayments by increasing them, so you will need to make sure you can afford the change.

Mortgage repayment frequency

When you take out a mortgage loan, you will have to make regular repayments to repay the lender. These repayments can be made at different frequencies depending on your lender and loan type, this is referred to as mortgage repayment frequency.

When organising your home loan, you will need to work out which mortgage repayment frequency is right for you. For instance, if you get paid fortnightly switching to fortnightly repayments may work better for you.

Loan to value ratio (LVR)

Loan to value ratio (LVR) is the amount you are borrowing from your lender as a percentage of the total value of the property you're using as security for your loan.

Considerable emphasis is placed on LVR by lenders as it indicates the level of risk they are taking when lending you money. The higher the LVR, the bigger the implied risk. Having a larger deposit before you apply for any home loans will help minimise the LVR and therefore the implied risk.

Lenders mortgage insurance (LMI)

Lenders mortgage insurance (LMI) is taken out by the lender as protection for them. It is used to cover the cost of the loan and any other expenses if you default on your home loan. You can avoid paying this, often pricey, insurance by saving a higher deposit. 

Each lender deals with LMI differently. Typically it's applied when you have to borrow more than 80% LVR for full doc loans or more than 60% for low-doc loans. The cost is due upfront but can usually be capitalised into your loan. 

You can get an estimate on the premium you may pay with this calculator from Glenworth.

Mortgage protection insurance

LMI isn't to be confused with mortgage protection insurance which is something you as the borrower can take out to protect yourself. Mortgage protection insurance will help cover the cost of your mortgage repayments if you are unable to pay them due to illness, disability, unemployment or death.

Mortgage repayment calculator: What is it and how to use it

A mortgage repayment calculator is a tool that will help you to work out how much your home loan repayments will be. All you need to do is input information about your proposed home loan, and it will give you the repayment cost.

Every mortgage repayment calculator is different, but most will ask for:

  • Loan amount.
  • Loan type - whether you wish to repay your loan with principal and interest repayments or interest-only.
  • Proposed interest rate.
  • Mortgage repayment frequency - this can be monthly, fortnightly or weekly.

If you aren't quite sure of how much you might be able to borrow check out our borrowing capacity calculator to help. Just enter information around your income, expenses and the proposed loan details to find out both how much you can borrow and how much repayments will be.

Which mortgage repayment frequency works best for you?

A useful way you can use a mortgage repayment calculator is to work out which mortgage repayment frequency suits your financial situation. Depending on the lender and type of loan you can make your mortgage repayments either monthly, fortnightly or weekly.

Choosing which mortgage repayment frequency is right for you comes down to your personal financial situation. If you get paid fortnightly, then it makes sense to opt for fortnightly repayments as this would fit with other parts of your budgeting.

Monthly repayments are the typical mortgage repayments required on home loans, but there are benefits to considering fortnightly or weekly. Choosing an increased mortgage repayment frequency will save you money on interest and decrease the overall loan term.

Example of how mortgage repayment frequency impacts your loan
Basic information about the loan: Loan amount - $1.5million, Loan term - 30yrs, Interest rate - 2.75% interest rate (2.71% comparison rate) principal and interest loan, fixed for 3 years.
Monthly repayments (based on comparison rate) Fortnightly repayments (based on comparison rate) Weekly repayments (based on comparison rate)
Mortgage repayment $6,091.88 $3,045.94 $1,522.97
Interest saved $0 $87,647.75 $88,195.95
Time saved 0 years 3 years 5 months 3 years 5 months
Total cost of loan $2,204,502.38 $2,105,430.25 $2,104,882.06

How to avoid mortgage stress?

Taking out a mortgage loan is a substantial financial burden that can take a toll on your finances no matter how well you plan. Mortgage stress happens when the burden becomes too much, and you struggle to make your mortgage repayments.

Monthly repayments (based on comparison rate) Fortnightly repayments (based on comparison rate) Weekly repayments (based on comparison rate)
Mortgage repayment $6,091.88 $3,045.94 $1,522.97
Interest saved $0 $87,647.75 $88,195.95
Time saved 0 years 3 years 5 months 3 years 5 months
Total cost of loan $2,204,502.38 $2,105,430.25 $2,104,882.06


There are some simple things you can do to help avoid mortgage stress:

  • Don't overextend, be realistic about the amount you can afford to borrow, just because you can borrow an amount doesn't mean you should. Consider if you can afford to repay the amount even if your circumstances were to change. 
  • Save up as much as you possibly can. The larger your deposit, the lower your loan amount, and you will also avoid extra expenses like LMI.
  • Make a budget and stick to it, this is good advice for helping you to save before you take out your loan as well.
  • Plan for rate rises, when you are working out your mortgage repayments make sure that you can still make them if interest rates increase. It might be smart to plan for two rate rises to give yourself cover even if you are on a fixed-rate mortgage.
  • Be cautious of interest-only loans. An interest-only home loan will only be for a set period. Once this period is over, it will revert to a principal and interest home loan, which will see your repayments increase significantly.
  • Plan for the post-fixed period, once the fixed-rate period is over, it reverts to a variable rate. The variable rate may be higher, which will cause your repayments to increase. Whether you choose to refinance or just stick with the variable rate, make sure you plan your budget accordingly.

Example of how planning ahead will help avoid mortgage stress
Borrowing $1.5million you take out a variable home loan that is interest-only for five years and reverts to principal and interest after that. The interest-only rate is 2.99% (3.01% comparison rate) and reverts to 2.49% (2.52% comparison rate) after five years without any interest rate rises. 
For the first five years, you will pay $3,762.50 per month (based on comparison rate) which will go up to $6,744.37 per month. Despite having the loan for 5 years, you have not paid anything off the principal, which means it hasn't reduced. Now you will need to begin repaying that portion of the loan also. As you can see, your mortgage repayment will increase significantly.


Mortgage offset account vs extra mortgage payments with redraw

Utilising features that come with your mortgage loan such as an offset account or a redraw facility for extra mortgage repayments will help minimise stress.

Mortgage offset account

An offset account is a transaction account linked directly to your mortgage. The funds in the account will be deducted from your principal when your mortgage repayments are calculated and will reduce the interest amount you will pay. 

Offset accounts are generally only available with variable rate home loans. You can split your home loan between a fixed and variable rate, which attaches a portion of the loan to a fixed rate and the remainder to a variable. You can then have an offset attached to the variable amount.

You could use your offset account as your regular transaction account. Meaning you'll have things like your salary deposited into the account and use it for your daily spending. Any money in there at the time your lender calculates your mortgage repayment for the month will work to lower the interest you pay that month. 

You can also use the offset account as a savings account, making regular payments and letting it grow, which helps lower the interest you pay.

 

Example of how using an offset account will reduce your mortgage repayments and overall home loan cost.
Basic loan information:
$1.5 million loan amount, 30-year loan term, 2.49% principal and interest rate (2.52% comparison rate)
If you maintain $5,942.42 mortgage repayments per month (using the comparison rate).
Original repayments $20,000 in offset after
1 year
$40,000 in offset after
2 years
$80,000 on offset after
4 years
Updated total amount $2,139,272.23 $2,188,027.74 $2,099,383.50 $2,069,220.79
Interest saved $0 $21,244.50 $39,888.73 $70,051.44
Time saved 0 years
0 months
0 years
4 months
0 years
7 months
1 year
0 months
Updated loan term 30 years
0 months
29 years
8 months
29 years
5 months
29 years
0 months

Making extra mortgage repayments with redraw

Another option is to make additional repayments directly into your home loan, this will help repay your loan faster and save you on interest charged. You may still be able to access these payments if you need to through a redraw facility depending on your home loan terms. 

Some lenders may charge fees for the withdrawals or may cap how much you can redraw from your home loan. Redraw facilities, and extra mortgage repayments are usually only available with variable rate home loans. They sometimes are available on fixed-rate home loans with additional fees.

Example of how making extra repayments can help reduce your mortgage repayments and loan term.
You take out a variable principal and interest home loan with an interest rate of 2.49% (2.52% comparison rate) on a $1.5 million. The loan comes with unlimited extra repayments and redraw facilities, you decide to put an additional $500 into your loan a month.
Monthly repayments
(using comparison rate)
$5,942.42
Updated monthly repayments
(with additional $500)
$6,442.42
Original total amount $2,139,272.23
Updated total amount $2,061,531.02
Interest saved $77,741.21
Time saved 3 years 4 months
Updated loan term 26 years 8 months

Now that you have a better understanding of how mortgage repayments work and how to calculate them check out our range of home loans to find one that suits your needs.

Toni is the CEO of Yard

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