Price growth over 10 years covers loan interest costs in most states – Canstar

But not all borrowers are so lucky

Price growth over 10 years covers loan interest costs in most states – Canstar


By Mina Martin

The official cash rate staying on hold for the third month in a row does not mean the interest bill on mortgages will remain steady, according to Canstar, with borrowers now paying nearly $800,000 in interest on the average home loan.

The average $580,240 owner-occupied home loan has an interest bill of $792,693, meaning the true cost of the typical home loan in this country is $1.37 million, Australia’s biggest financial comparison website said.

The analysis was based on the Reserve Bank’s average standard variable interest rate over the past three decades of 6.88% and assumes the borrower takes 30 years to repay the Australian Bureau of Statistics current average loan amount.

“Interest continues to be calculated on the daily balance and charged monthly in arrears,” said Effie Zahos (pictured above), Canstar’s editor-at-large and money expert. “What will surprise a lot of mortgage holders is just how much interest we pay on our home loans. The longer we take to pay off our mortgage, the bigger our interest bill will be.”

Zahos said this was concerning because of the growing number of Australians aged over 55 living with a mortgage.

“Research shows that in 2021, 23% of over 55s had a mortgage, which is up from 19 percent in 2011. That’s over half a million more older Australians living with a mortgage than a decade ago,” she said.

There was a bright spot for mortgage holders though.

Property price growth over the past decade has during that period covered the loan interest costs in most states and territories, Canstar’s research showed.

Someone who bought an average-priced property 10 years ago in NSW for $580,000 with a 20% deposit would have forked out around $193,696 in interest costs on their $464,000 loan over the period. Meanwhile, the value of their property would have increased by around 6.5% per annum, or $508,740 in 10 years, putting the borrower $315,044 ahead after interest costs have been accounted for.

But not every homeowner will be so lucky.

In WA, mortgage holders have paid nearly as much interest costs over the past decade as those in NSW at $191,258. But property prices in WA only increased by an average 1.6% per annum, or $98,519 over 10 years, leaving a $92,739 shortfall between what they paid in interest and the property price growth during that period.

In NT, too, property price growth over the past decade was not enough to make up for the $164,375 interest bill borrowers paid on the average loan taken out in 2013.

This analysis does not take into account any equity borrowers may have accumulated by paying off their loans.

“Many Australian property owners have been very fortunate to have seen sustained property price growth in a number of the country’s key markets, but it’s not always guaranteed,” Zahos said. “Some borrowers haven’t experienced the price growth needed to outweigh their loan’s interest costs.”

“Slower property price growth and repaying a loan at a rate that’s less than competitive can compound the problem.”

On an average $580,240 loan at a rate of 6.88%, a borrower’s interest bill over 30 years will be around $792,693 – that’s equivalent to paying 137% of the original loan amount to the bank. Repaying a loan at a rate of 5.88%, meanwhile, could cut $136,623 off their interest bill to $656,070, which was equivalent to paying an extra 113% of the original loan amount to the bank, Canstar research showed.

“The more interest a borrower pays, the more this bill eats into their potential profit,” Zahos said. “When selling a home, we factor in agent fees and stamp duty paid, but often, we forget to take into account our interest bill.”

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