Avoid These 4 Home Loan Repayment Mistakes

The way you structure your repayments can matter as much as the rate you choose. For Paddington borrowers, a few small decisions about frequency, offsets and loan splits can change how quickly a home loan reduces.

This article covers the repayment mistakes we see most often and how to avoid them. If you are reviewing a current loan or preparing to apply for a home loan, these points are worth settling before you sign.

Is Interest Only or Principal and Interest the Right Repayment Type?

Principal and interest repayments reduce your loan balance from the first month. Interest only repayments cover the interest alone for a set period, so the balance stays the same.

Interest only is generally used for investment loans or short-term cash flow needs. The trade-off is that the balance does not fall during that period. When it ends, repayments are recalculated over a shorter remaining term, so they rise.

As an example, take a $800,000 loan over 30 years at an illustrative rate of 6.75% p.a. Principal and interest repayments would be about $5,189 a month. If the same loan ran interest only for five years at 6.75%, the repayment would be $4,500 a month. After that, the loan would revert to principal and interest over the remaining 25 years, and the repayment would be about $5,527 a month. That is roughly $338 more a month than the original 30-year repayment would have been.

For an owner occupied home loan, many lenders price principal and interest more sharply than interest only, so check the rate difference with your broker.

Mistake One: Ignoring the Offset Account

A linked offset account reduces the balance your interest is calculated on, without locking your savings away. Money sitting in the offset is still accessible.

The trade-off is that loans with a full offset often carry a higher rate or an annual package fee. The offset is worth it only if your balance is large enough to outweigh that cost.

Consider a borrower with an $800,000 loan at an illustrative 6.75% p.a. who keeps $40,000 in an offset account. Interest is charged as if the loan were $760,000. At that rate, the $40,000 saves about $2,700 a year in interest, before any difference in fees or rates. If the offset loan costs $400 a year more in fees, the net saving is about $2,300. If the borrower only holds $5,000 in the account, the saving is about $338, and the fee could cancel most of it.

The outcome depends on the balance you actually hold. A borrower who keeps a salary and savings buffer in the account will usually benefit more than one who spends down to near zero each month.

Should You Choose a Variable Rate, Fixed Rate or Split Rate?

A variable rate moves with the lender's decisions, a fixed rate stays the same for a set term, and a split loan divides your balance between the two. Each suits a different priority.

Variable loans usually allow extra repayments and offset accounts. Fixed loans give certainty, but many limit extra repayments and can charge break costs if you exit early. A split rate gives you some of each, though you manage two balances and the offset may only apply to the variable portion.

If your fixed term is ending, review your options before it rolls to the lender's revert rate. Our fixed rate expiry page explains what to check.

Do Extra Repayments Actually Shorten Your Loan?

Yes. Any extra amount paid on a variable loan goes straight to principal, which reduces future interest and shortens the time it takes to repay the loan.

The key is to confirm that your loan allows extra repayments without penalty and that the money can be taken out again if needed. A redraw facility offers this, though lenders can set conditions on access. An offset account is often more flexible.

Paying fortnightly instead of monthly can also help. Because a year has 26 fortnights, you make the equivalent of 13 monthly payments rather than 12, provided the fortnightly amount is half the monthly figure. Check your lender's repayment frequency options before changing.

Mistake Four: Never Reviewing the Loan After Settlement

A loan that suited you at settlement may not suit you after your income, savings or property plans change. A yearly review keeps the structure aligned with your situation.

If your lender has not adjusted your rate in line with what new customers receive, you can ask for a rate discount or look at refinancing. The trade-off is that switching can involve discharge fees, application fees and a new credit assessment, so the saving should be compared against those costs.

A loan health check is a practical way to see whether your repayment type, offset and rate still fit. If you want to know how much a lender may offer, our borrowing capacity page is a useful starting point, and a calculator can help you test repayment figures before you commit.

Some borrowers with larger loans or variable incomes consider combining an offset with a split rate, but the offset may apply only to the variable portion and may carry extra costs, so the right mix depends on your goals and your lender's terms. Our team can map out the options with you through our Paddington mortgage broker service.

Call one of our team or book an appointment at a time that works for you, and we will review your repayment structure together.

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