How you choose to shape your home loan payments can make a difference to how much it will cost you overall. Here’s a quick guide that may help.
When you take out a home loan the money you borrow (the loan balance) is called the principal and what you are charged to borrow that money is called interest. The time over which you choose to repay the loan is the loan term.
At the end of the loan term you need to have repaid the principal and interest.That amount will depend on a number of things including your interest rate, loan term and type, and the frequency and type of payments.
To get a good idea about how to construct a loan, use our repayments calculator now.
Unless you are making an interest-only payment, one part of your payment covers your interest and the other part repays your principal, which reduces your loan balance. How those payments are split depends on the type of loan you have.
The more you reduce your loan balance, the less total interest you get charged, so how you choose to shape your payments and how much goes towards the principal is an important decision. Find out more about this below.
There are different ways you can choose to repay your home loan. With a term loan you make regular payments over the loan term. A revolving credit home loan is more like an overdraft.
How you choose to shape your payments or credit limit can help you save money by reducing the interest you are charged.
Table loans can make budgeting easier as your payments are spread out evenly over the full term of your loan. However if you are on a variable interest rate, that rate may go up or down, which will affect your payment amount. If you are on a fixed rate, your payments will remain the same during the fixed rate period.
Part of every payment you make will go towards interest and the other part towards principal. At the start of your loan you’ll pay mostly interest and a little principal, and with each payment you’ll pay less interest and more principal than the previous one.
If you want your regular payment amounts to reduce over time, consider a reducing loan. The principal portion of your regular payment remains the same throughout the term of your loan while the interest portion will reduce. This means your regular payment amount will steadily decrease over time.
Paying interest only could be an option for a short term situation. You might want interest-only payments to keep more of your disposable income free for other uses. For example, if you are going on parental leave and your income temporarily changes.
Each of your payments will only cover the interest cost. This is calculated on the outstanding principal balance.
You may be able to make interest-only payments for a period of 6 months up to 5 years within a longer loan term. For example, you have a 20 year loan term but pay interest-only for two of those years.
Please discuss the option of interest-only payments with us as these are subject to meeting specific lending criteria and terms.
A loan payment holiday lets you take a break from your loan payments. You can take up to 3 months break from making payments but there must be a minimum of 12 months between the expiry of a loan holiday and the beginning of another. Some people might do this to take an overseas trip or extend parental leave.
The interest that would have been paid is added to and increases your loan balance. This will increase your regular payments and may increase your loan to value ratio (LVR).
If you are struggling with your repayments and are experiencing financial difficulty, talk to us because there are ways we can help. Loan holidays are subject to meeting specific lending criteria and terms.
An ASB Orbit home loan is like an overdraft on a transaction account with the flexibility to repay your principal at your own pace. You have a set credit limit up to which you can redraw available funds. Interest on your loan balance is calculated and accrued daily and charged monthly.
This is similar to the Orbit Home Loan; except the maximum amount you can redraw reduces regularly.
With Orbit FastTrack, your maximum credit limit decreases fortnightly or monthly and your interest is charged on the same day. You can redraw available funds up to your credit limit at any time.
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ASB's lending criteria, terms and fees apply. A loan processing fee of $400 and a low equity margin may apply. Orbit home loans are not available for business purposes. Orbit Home Loans are subject to specific lending criteria and are periodically reviewed by ASB. A $12 monthly account fee applies to Orbit and Orbit FastTrack Home Loans, which may be altered from time to time.