How extending your mortgage can hurt

05 Mar 2019

Not all low interest rates are created equal. To get the best deal you need to consider both rate and loan term.

Not all low interest rates are created equal. To get the best deal you need to consider both rate and loan term. Miscalculating the loan term can cost thousands in extra interest paid.

To explain what we mean, here’s everybody’s favourite thing - a surprise maths test:

Say you need to borrow $25,000.

You have the choice of that borrowing that amount at a rate of:
A: 5.5% over 20 years
B: 15% over 3 years.

Which do you think is cheaper? At first glance it would be easy to assume the lower interest rate over the longer period would be cheaper. Rolling that extra $25,000 up in your existing mortgage seems pretty tempting.

In fact, by borrowing $25,000 at 5.5% over 20 years, with monthly repayments, you’ll be paying a total of $41,273, or $16,273 just in interest.

Compare that to paying back a $25,000 loan at 15% over three years, with monthly repayments, where you’d pay back a total of $31,199; or $6199 in interest.

That’s almost $10,000 less.


We also realise that sometimes interest isn’t everything, and of course, different loans at different rates over different periods of time, and different fees, will throw up different results. The other factor to consider is how much you can afford to pay back each week.

For some people rolling extra finance into their mortgage makes sense, because it’s simple: one payment to think about. We get it. We’re big fans of debt consolidation here at Harmoney.

Many people promise themselves they will be super-disciplined in repaying the amount added to their mortgage within a three- or five-year term, saving the difference in interest cost. But sometimes, that’s easier said than done. Having the loan amount folded into your mortgage makes it hard to see the true cost of servicing that extra debt, and makes it easy to slide back to repaying just your minimum amount each week or month.

If you have a personal loan and are thinking of transferring it to your mortgage, we’d suggest doing some maths homework first, to make sure you are making the right financial decision. The good people at MoneySmart have very handy loan and mortgage calculators that will help you directly compare how much you’ll pay on your loan, and how much of that will be interest.

Some other things to take into account are:

  • Is your mortgage rate fixed or floating? This will also impact your total repayments.
  • Will your bank charge you fees for refinancing your mortgage?
  • Before you decide which type of loan is for you consider what you can afford to repay and how long you want the debt hanging around.
  • Remember it’s the interest cost that counts, rather than the interest rate.

Try Harmoney's personal loan calculator.

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Welcome to Credit Score Bootcamp

  • We write these articles for you, our Harmoney borrowers, to be, what we hope are helpful tools for different aspects of life. The information is designed to be a general guide only. As you read, you should consider how - or if - the information might apply to your circumstances, and consider if your needs mean you should seek further advice from an expert in that particular field.

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