Reduce Loan Duration to Save Interest?

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  bobbified on 09/06/2022 - 20:27

  +3

  If you owe money for a shorter period, then yes, you generally pay less interest than if you owed money for a longer period (unless you sign a fixed rate loan, then the total amount repayable is generally fixed).

  If short I want to know if I should renegotiate my loan for a shorter term, or if it makes no difference.

  The difference in the loan term (or the amount of the loan) you take out will just vary the minimum monthly payment you must make. If you pay more, you pay it off faster and pay less interest overall.

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  Benoffie on 09/06/2022 - 20:54

  +12

  You always want to take the loan over the maximum period. Then you pay more than is necessary fortnightly not monthly.

  Reason - you don't know what will happen in the future and the lower repayment level is where any negotiation on freezes will stem from in case of lost income etc. It will also generate a greater repayment buffer to fall back on in times of difficulty.

  • 

    Krankite on 10/06/2022 - 09:58

    +3

    Just to piggy back on this, for most people an Owner Occupier Home Loan will be the best interest rate available to you so take advantage of it. Particularly if you have an offset no reason to reduce the amount or duration unless the fee's are killing you.

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  avoidfullprice on 09/06/2022 - 21:01

  +2

  Is exactly what you said, they calculate daily based on your end of day closing balance. If you rate is 5%, interest for that day is 5%/365 x balance.

  They charge you interest month, which is basically the sum of daily interest since they charge you last

  Changing the loan term only changes your minimum repayment amount.

  Just pay down the loan by more than minimum and you will pay off your loan in shorter time.

  You dont need a simulator. Look up the PMT function on excel.

  • 

    jakka on 10/06/2022 - 18:24

    In a leap year they actually over charge you as interest is charged daily at %/365 for the 366 days in the year. It might seem insignificant but adds up to 100+ million extra for the banks.

    • 

      avoidfullprice on 10/06/2022 - 19:10

      In a leap year people on salary gets more than quoted annual amount. It might seem significant but it wouldnt help with price of iceberg lettuce

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  trustnoone on 09/06/2022 - 21:10

  If short I want to know if I should renegotiate my loan for a shorter term, or if it makes no difference.
  Now if you have 50k in your offset

  As I understand it, you have it correct but there is no point in renegoitating your loan as they allow an offset (as its not fixed). So your maximum time you have is 30 years, but if you're putting money into it earlier in your offset its the same as having 15 years as you said. But as you can do that already its sometimes best to take the full loan time so if some years things are difficult you can just not pay as you're already have that money in offset, or if an emergency comes up. Unless you're sure you can pay, and re-negotiating the length means a smaller interest rate, there's no difference.

  how much I owe them at a specific point in time

  I'm not sure about this but I think it has to do with the payment frequency, say monthly/fortnightly/weekly. Thats why some say you pay less interest weekly vs monthly as the monthly will include the missing amount within its month, while weekly only within its week (see "If Payback Biweekly" part in your calculator).

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  wei13 on 09/06/2022 - 21:20

  As Avoidfullprice said interest is usually calculated daily.

  If you want to pay less interest, then you want to pay down your principle as much as you can, as early as you can. This will provide an exponential reduction in total interest paid.

  If you look at your own calculator, $100k loan over 30 years requires $421.60/month. While $100k over 15 years will only require $690.58 (half the time, but not double the repayment). Over 30 years, 34% of your total repayment is interest, while only 20% of total repayment is interest in the case of 15 year term. This is because early in the loan proportionally most of your repayments will be going towards paying interest, whilst later in the loan more of your repayments will be going towards the principle part. The earlier you can reduce the principle, the less interest you will pay overall. And yes the offset account is great for that purpose to reduce the amount of your repayments going towards interest rather to the principle.

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  tyarrhea on 09/06/2022 - 21:20

  +2

  For a standard loan with no offset, a shorter term will increase your monthly repayment so you will save on overall interest. Even paying weekly over monthly will save you interest because the banks calculate the interest daily.

  But for a loan with an offset account, this will not have any impact because the interest is calculated on the outstanding loan balance after reducing it by the offset account.

  Another way to look at it is that the offset account is 'earning' interest at the same rate as your mortgage interest rate but instead of the bank paying you the interest 'earned', it reduces the monthly mortgage interest amount that is charged.

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  tio on 09/06/2022 - 22:09

  +2

  In that case, I would say that paying back a 30 years loan in 15 year is the same as paying a 15 year loan.

  Yes. However, there can be some differences in fees.

  If short I want to know if I should renegotiate my loan for a shorter term.

  If i were you, i'd keep the loan term as is, and make top up payments as much as I can. Best case, you fully pay off the loan with some years left, leaving the account open and assuming you can redraw, that would mean you have access to a line of credit at home loan interest rate which is usually the best rate of all type of credits. Switching 30yr to 15yr term would also almost double your monthly repayment amount. It's always nicer to have a lower minimum monthly repayment than a higher one that is almost double.

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  SF3 on 09/06/2022 - 22:17

  If short I want to know if I should renegotiate my loan for a shorter term

  If you have $$ in your offset, even if your repayment doesn't change, but you're actually paying off your principal quicker. This mean you are paying off your loan faster, and if you continue add $$ into your offset over time, your principal repay is accelerated further. How many years ahead of the 30 year will depend your offset.

  Imagine you had enough $$ in your offset for the remaining loan amount, then you are effective paying off 100% principal 0% interest, you can divide the remaining loan by the repayment to see how long it'll take.

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  rektrading on 09/06/2022 - 22:29

  +1

  3% over 30 years.

  This is basically free 💵.

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  AustriaBargain on 09/06/2022 - 22:37

  If you have so much spare money why not take out another loan and buy even more investment properties? In 20 years when property values triple you'll be able to retire early, or keep living it easy on the rent collecting. Then when you die your kids or next of kin becomes an overnight millionaire and they get to live on easy street too. But by the time they die they would have squandered it all, so your financial legacy probably won't last more than a single generation.

  • 

    Romain on 09/06/2022 - 23:55

    Nah I'll just die poor and make them work for it

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  Seraphin7 on 09/06/2022 - 22:43

  +1

  Short answer is it makes no difference.

  The interest you pay per day, week, month, or year (or any other period) is a function of the principal amount outstanding, not the agreed duration of the loan.

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  Donaldhump on 09/06/2022 - 22:49

  +3

  the way i see it, there is no point in reducing your loan term, instead keep the loan as long as you can, if you have the 50k in an offset the loan could be for 20 years, 30 years, 1000 years, any extra you can repay by reducing your loan term and thus increasing the repayments just put in the offset.

  if @ 30 years your repayments were $200 a week, and @20 years was $300 a week, just keep the 30 year loan, put $300 in your offset and they will take $200 for the loan repayment, will work out exactly the same, but with the flexability to use that extra $100 when you chose. Furthermore should you become unemployed, want the money for another place, or the next shitcoin, its yours.

  the bank won't (afaik) reduce your monthly payment by half if you have half in the offset, but your repayments will reduce overtime a little by little.

  interest is calculated daily. (internally it is forward projected every month and adjusted if need be). In a nutshell take the loan as long as possible, make the minimum repayment only and offset the rest. Never use a redraw it sucks for tax limitations later on

  fwiw my home loan got refinanced and has 29 years left on it and i will be 73 by time i pay it off but its 100% offset so it is effectively paid off. but should i want the cash its there instead of having to into the bank and begging should i be 55 and unemployed. the money just sits dormant. with the recent interest rate rises my repayments go up, but i don't touch anything.

  what was weird when i had a home loan with suncorp 15 years ago 100% offset they reduced my repayments to 30c a month, which seemed mental as if i left it that for 29 year my repayments would go up at a mental speed.

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  Romain on 09/06/2022 - 23:59

  Thanks for all you answer. Clear.