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How Variables in a Home Loan Affect Repayments
When taking out a home loan understanding how different variables influence your repayments is key to managing your finances effectively. Whether you’re a first home buyer or refinancing, the structure of your mortgage can significantly impact what you pay each month. Here’s a breakdown of the main factors and how they work under Australian lending rules.
1. Loan Amount (Principal)
The principal is the amount you borrow from the lender. Naturally, the larger the loan, the higher your repayments will be. For example, a $500,000 loan will have heftier monthly repayments than a $300,000 loan, assuming all other factors remain equal. In Australia, lenders typically require a deposit (often 20% to avoid Lenders Mortgage Insurance, or LMI), which reduces the principal and, in turn, your repayments.
2. Interest Rate
The interest rate is one of the biggest drivers of your repayment costs. In Australia, you can choose between a variable rate, which fluctuates with the Reserve Bank of Australia’s (RBA) cash rate and market conditions, or a fixed rate, locked in for a set period (e.g., 1–5 years). For instance, on a $400,000 loan over 30 years, a variable rate of 6% might result in monthly repayments of around $2,398, while a 5% rate drops that to $2,147—a difference of over $250 a month. Keep an eye on rate rises, as they can quickly increase your repayment burden.
3. Loan Term
The loan term — typically 25 or 30 years — determines how long you have to repay the loan. A longer term reduces monthly repayments by spreading the principal and interest over more payments, but it increases the total interest paid over the life of the loan. For a $400,000 loan at 6%, a 30-year term means $2,398 monthly, while a 20-year term bumps it up to $2,866. Shortening the term saves on interest but requires higher monthly cash flow.
4. Repayment Type: Principal and Interest vs. Interest-Only
Home loans generally come in two flavours: principal and interest (P&I) or interest-only (IO). With P&I, you pay down both the borrowed amount and the interest, steadily building equity. With IO, common among investors, you only pay the interest for a set period (e.g., 5 years), resulting in lower initial repayments but no progress on the principal. For a $400,000 loan at 6%, an IO repayment might be $2,000 monthly (interest only), compared to $2,398 for P&I. Once the IO period ends, repayments jump as you start tackling the principal over a shorter remaining term.
5. Extra Repayments and Offset Accounts
Many loans, especially variable-rate ones, allow extra repayments or feature offset accounts. Paying more than the minimum reduces the principal faster, cutting both interest and the loan term. An offset account—a linked savings account—reduces the interest charged by offsetting the loan balance. For example, keeping $20,000 in an offset account against a $400,000 loan means you’re only charged interest on $380,000, lowering your repayments slightly each month.
6. Fees and Charges
Don’t overlook upfront and ongoing fees, such as application fees, annual fees, or LMI if your deposit is less than 20%. These can add to your loan balance or out-of-pocket costs, indirectly affecting affordability and repayment calculations. For instance, LMI on a $400,000 loan with a 5% deposit could add $10,000 or more to the loan, nudging up your monthly repayments.
Putting It All Together
Your home loan repayments hinge on a delicate balance of these variables. A lower interest rate or shorter term can save thousands over time but might strain your budget month-to-month. Conversely, an IO loan or longer term eases cash flow but costs more in interest. Tools like online mortgage calculators from banks like Commonwealth Bank or Westpac can help you tweak these variables to see their impact.
Before signing up for a home loan or mortgage, consider your financial goals—whether it’s paying off the loan quickly or maximising tax benefits as an investor—and chat with a mortgage broker to tailor the loan to your needs. With the RBA’s cash rate influencing variable loans and competition among lenders, staying informed can make all the difference to your hip pocket.
Note: Figures are illustrative and based on typical Australian mortgage conditions as of 12 March 2025. Always check with your lender for exact rates and terms.