In this guide, we explain what home loan repayments are and answer frequently asked questions like how can you increase or decrease your repayments? and what happens if you miss a repayment?
What are home loan repayments?
Home loan repayments are regular payments that you made to your lender to pay back the loans you borrowed to purchase a specific property.
The amount and repayment frequency paid are agreed upon between the borrower and lender during the application process and this is being determined by interest rates, the length of the loan term and the type of home loan.
What are the different repayment types?
There are two different types of home loan repayments available. The type of repayment you choose will depend on your situation and property goals. It’s whether you need a home or you need an investment property.
What are the different repayment types?
- Principal and interest (P&I): P&I repayments require you as the borrower to pay off the loan amount as well as the interest rate charged by the lender. They are more common for owner occupied properties
- Interest only (IO): IO repayments require the borrower to only pay off the interest accrued on a home loan for a set period. This will revert to P&I repayments once this fixed period is over. Not everyone will be eligible for IO repayments and they are more common among investors.
What is the process in calculating mortgage repayments?
Your repayment amount, this will depend on your interest rate, loan term and and repayment frequency.
For example, let’s say you’re making principal and interest (P&I) repayments on your home loan. If you borrow $300,000 on a loan term of 25 years with a 2.19% interest rate and choose to make monthly repayments, you will owe $1,299 each month.
If you were to increase your loan term to 30 years and keep everything else the same, your monthly repayments would decrease to $1,138. However, due to the longer repayment term, you would have paid an extra $19,980 in interest over the life of your loan.
You can calculate your repayment by trying Wealthy You Mortgage Repayments Calculator.
How often do you need to make mortgage repayments?
Home loan repayments are usually monthly. You may be able to request the frequency of your repayments to fortnightly or even weekly, depending on your lender or with your choice.
If you’re on a variable interest rate, you’ll typically be able to make extra repayments as you wish.
If you’re on a fixed rate home loan, you may be able to make limited extra repayments up to a certain amount. This amount will depend on the terms set out in your loan.
If you’d like help negotiating your home loan terms with your lender, Wealthy You Broker can negotiate on your behalf and help you through the process.
How do you make mortgage repayments?
There are several options to make your repayments. This will depends on what payment options your lender is accepting.
There are choices with regards to repayment:
✔️ Direct debit from your nominated bank account
✔️Internet or phone banking, or through your lender’s app
✔️Electronic transfer
✔️ Visiting your lender’s physical store or branch.
Can you increase your repayment amount?
Yes, you can increase your loan repayments, but this is only if you are financially stable. This is great decision for you to pay off your loan sooner and this can lessen the interest during the loan terms.
But, your ability to make extra repayments will depend on what kind of home loan you currently have and the terms and conditions during the application process.
You typically shouldn’t have any issues making unlimited repayments if you’re on a variable rate home loan or on the variable portion of a split rate home loan.
On the other hand, If you’re on a fixed rate loan, you may encounter some issues. Fixed rate usually have limit and if you exceed to the limit, banks may charge you a break free.
Other way of increasing your repayment is by increasing your payment frequency. For example, by simply shifting from monthly to fortnightly repayments, you pay an extra month’s worth of repayments a year. This is simply because there are 12 months in a year, but 26 fortnights.
How much can you save in interest if you make extra repayments on your home loan?
As we’ve mentioned, if you’re on a variable rate, you should be able to make extra repayments whenever you like.
Making additional repayment is a great choice. This can save you time off with regards to your loan term and lower the amount of interest you pay over the life of your loan.
The earlier you can make extra repayments, the more you’ll be able to trim your principal amount down and save on interest as a result.
Example is: You have a balance of $400,000 on your loan with a 28 year loan term and an interest rate of 2.10%. If you can make an extra monthly repayment of $100 per month from the first year of your loan, you will be saving $11,065 in interest and cut 2 years and 3 months off your loan term.
Use Wealthy You Extra Repayments Calculator to find out how much you could save by making extra repayments.
Can you decrease your repayment amount?
Your situation is changing, you may ask your lender to make some adjustments on your home loan mortgage. This is to avoid stress and for you to improve your financial position.
If you need to decrease your repayment amount, you may be able to do this in a number of different ways, depending on your loan type.
Refinance your home loan
If you got a lower interest rate on your home loan, you will also have the ability to decrease your repayments. One thing to lower your interest rate is by refinancing your current home loan to other financial institutions. It’s your decision to refinance your home loan every couple of years as your financial circumstances change to maintain a competitive rate.
You may want to refinance your home loan every couple of years as your financial circumstances change and to maintain a competitive rate.
Doing so will also allow you to switch between fixed, variable and split rates, switch lenders, access equity and loan features like an offset account as well as consolidate debt.
If you’re refinancing to a lower rate to save money and free cash flow, it’ll be important to check the costs of refinancing with the amount you’ll save to see if it’s actually worth it.
Refinancing costs can include home loan application and establishment fees, property valuations, break fees if you’re on a fixed rate and Lenders Mortgage Insurance (LMI) if you have less than 20% equity in your home.
Do a Rate Review with your lender
You can get a lower rate by just negotiating this with your lender. This is what we call rate review. This can typically happen when your lender is offering a lower rate to new customers and you request them to match your rate.
If you’ve been a responsible borrower, have a healthy credit score, make your repayments on time and have a Loan to Value Ratio (LVR) below 80%, you’ll have a stronger chance of success in your negotiation.
Lenders will typically be more open to lowering your rate if you can prove you’re a low risk and reliable borrower.
It’s worth considering that even if you’re able to lower your interest rate, maintaining your repayment amount will help you pay off your loan faster and reduce the interest accrued on your loan overall.
Go on a repayment holiday
There are certain circumstances where lenders will allow you to decrease your repayment for a fixed period of time or take a repayment holiday if you need it. These might include if you’re going on maternity leave or need to take leave from work due to injury or illness.
If you’re eligible, a repayment decrease or repayment holiday (where you pause your repayments altogether) will usually only be permitted for up to 12 months. Some lenders will require you to make extra repayments leading up to this period.
It’s important to think about how taking a repayment holiday will affect you and your home loan. Consider this decision on whether it will benefit you in the long term, or if there’s an alternative option that can be a much better choice.
As a result of pausing your repayments, your credit score may be negatively impacted and you may not be able to refinance for 6-12 months. Your loan term might also be impacted, resulting in your paying more interest over the life of your loan.
If you’re considering this option, it may help to speak to an Wealthy You Broker, who can help you review all your options.
What happens if I miss my repayments?
If you happen to miss repayment, your lender will typically give you the chance to catch up and repay it, as long as you address it as soon as possible.
Some lenders may charged you a fee as a result, but if you’re able to repay it quickly and continue making future repayments on time, you’ll be back on track.
If you default on your repayments, you’ll likely be charged additional fees and interest, as well as have this recorded on your credit file.
The new credit reporting system, ‘Comprehensive Credit Reporting’ (CCR), was introduced just a few years ago. Under this system, payments more than 2 weeks overdue are listed as ‘late’ on your repayment history information.
You are given a 14-day ‘grace period’ to pay off the late payment so that it’s not recorded on your credit file.
If the grace period ends, and you failed to make this payment, this default will remain on your credit report for 2 years.
Continually missing your repayments may lead to you defaulting on your loan and losing your property. A default, as well as any credit enquiries, court judgments and summons, will stay on your credit report for a period of 5 years.
Before your lender repossesses your property, they will issue a Default Notice and give you 30 days to repay the money you owe.
If you fail to do this, they will issue a Statement of Claim to notify you of their plans to repossess your property before doing so.
If you feel you’re struggling with your home loan or experiencing mortgage stress, it’s best to talk to a financial adviser or your broker for guidance.
If you have any questions about your mortgage or property, reach out to an Wealthy You Broker who will be happy to help.
