How Your Loan Term Affects the Interest You Pay
From Aaron’s YouTube: “Save $500k just by changing the mortgage length #newzealand #firsthome #kiwisaver ##nzfirsthome”
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Posted 29 April 2025
The short version
- A 10-year loan term could save you over $500,000 in interest compared to a 30-year term.
- Banks typically approve 30-year terms because the lower repayments fit within most borrowers' budgets.
- You can still pay off your mortgage faster by making extra repayments, even on a 30-year term.
- Working with a mortgage adviser can help you structure your repayments to pay less interest overall.
The power of a shorter loan term
Choosing a 10-year mortgage term instead of 30 years could save you over $500,000 in interest over the life of the loan. That's because you're paying off the principal faster, which means less time for interest to accrue on the remaining balance.
However, banks usually won't approve a 10-year term for most borrowers. The higher repayments required to pay off the loan in a decade would stretch many household budgets too thin. That's why 30-year terms are the default - they keep the minimum repayments affordable.
You can still pay faster than your term
Even with a 30-year mortgage, nothing stops you from paying it off much sooner. By making extra repayments whenever possible, you can mimic the effect of a shorter loan term without committing to unaffordable minimum payments.
The key is that every extra dollar you put towards your mortgage reduces the principal balance immediately. With less principal left, less interest accrues each month, creating a compounding effect that can shave years off your mortgage.
Getting the right strategy
A mortgage adviser can help you structure your loan to pay it off faster without financial strain. This might involve choosing a flexible loan structure that allows for extra repayments, or simply creating a repayment plan tailored to your budget.
Smart strategies could include splitting your loan into portions with different repayment schedules, or linking an offset account to your mortgage. The goal is paying as little interest as possible while keeping your cash flow manageable.
This is general information, not personalised financial advice. For advice on your situation, talk to Aaron.
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