How much will your home really cost?
Sitting down? Good. We all know we pay interest on home loans but looking at the total paid out over the life of a loan can be like looking into the sun.
Brace yourself, because Canstar have put on their sunnies and crunched the numbers to calculate home buyers taking out an average owner-occupier loan in Australia today – $584,907 – will repay $1.38m over the course of a 30-year loan. That’s a slightly stomach-churning $799,060 in interest*.
While shocking, looking at these long-term figures can actually help underline the big impact small strategies can have over the life of a loan to substantially cut that interest bill. For instance, Canstar also calculated that just switching to fortnightly rather than monthly payments could shave almost $200,000 and six years off the same 30-year loan.
And there’s more positive news. A shorter-term analysis found that during the past 10 years, rising property values have outstripped the total cost of interest payments on the average home in most Australian States, putting buyers ahead.
However, the key word here is most. While, on the whole, people who climbed onto the property ladder in 2013 were in the black, notable exceptions were buyers in Western Australia and the Northern Territory.
In WA, relatively modest price growth of 1.6 per cent a year over the past decade has left more recent borrowers in negative territory. Based on the average home price in 2013 of $572,700, borrowers who bought with a 20 per cent deposit would have paid $191,258 in interest over the decade to 2023. During the same period, their property only rose in value by $98,519, leaving a $92,739 shortfall between loan costs and valuation gains.
That on-paper loss was even greater in the NT, where an overall fall in valuations added to interest payments to leave the average buyer $193,122 worse off over 10 years.
It was a very different story in chart-topping New South Wales. Back in 2013 the average property price in NSW was almost level-pegging with WA’s, at $580,000. But while values in the west languished, over the decade east-coast properties rocketed up by $508,740 to almost $1.1m, leaving average homeowners with gains of $315,044 after deducting interest costs.
It’s worth noting the recent sluggish performances of WA and the NT may be linked to over-performing in the preceding decade. From 2002-2012, Perth and Darwin posted the sharpest rise in house prices across the country, and were the only two capitals to post price growth of more than 100 per cent, according to CoreLogic’s Home Values Index.
Small change, big savings
Although it can be confronting to look at how costs add up over the lifetime of a loan, flipping your viewpoint to look at how saving can also accumulate can be motivating.
There are three simple but very effective strategies to cut thousands from your loan bill:
- Switching from monthly to fortnightly payments.
- Utilising offset accounts.
- Refinancing to a lower interest rate.
Easily the biggest saving hack is the switch to fortnightly payments. Instead of paying monthly, borrowers divide their monthly payments in half (rounding up or down) and pay fortnightly. Because there are 26 fortnights each year, you effectively end up making the equivalent of 13 monthly payments each year without noticing the extra month. Over an average 30-year loan, that can shave off more than $192,000 and six years.
Download a mortgage calculator and play around with different repayment options. You might be surprised at the impact of even the tiniest change. Raising fortnightly payments by just $5 can save thousands.
Contact the team at Provide Finance to review your finance options.
*Canstar analysis is based on the Reserve Bank of Australia’s rported average standard variable interest rate over the past 30 years of 6.88%.
**Lawless T, The long game…30 years of housing values, CoreLogic Property Pulse, 29 August 2022.