Loan term: How to plan your innings?

Cricket is one of my passions. Its many intricacies never fail to fascinate me... I can sit down and watch cricket in any form and be riveted by the drama that unfolds.

T20 cricket is all glitz and glamour; batsman go out to destroy bowlers. Gayle and McCullum hit the ball out of the ground consistently, it is entertainment galore. And there's always a result. 

One day cricket is more calculated, you have to pace your innings. Bowlers can dominate batsman as they have more time to work out weaknesses. Spin also comes into play more, but in the last 10 overs the batsman usually take command once more and score at 10 an over. A winner is decided on the day.

Test cricket is truly the long game. Batsman have to be more circumspect and score slower. An old coach of mine used to drill into us as young kids, bat for 4 hours and score a hundred – guaranteed. Bowlers can exert real pressure on batsman, making them feel uncomfortable with short pitch deliveries aimed at their heads. One mistake and the batsman’s day is over.

In some ways cricket is like your mortgage. For example, the end game is not always visible, especially if you're in it for the long haul like test cricket.

When you set your loan term you should consider: 

  1. A short loan term would be less than 10 years; this is like a T20 match. It's high scoring, your repayments may be super high, and you are destroying the principal like Gayle destroys bad bowling. The bank is the fielding team. They aren’t getting much out of the game as they don’t earn as much off you, and they are just there to stop the odd ball from reaching the rope. The loan is over quickly and there is a clear winner – You! BUT you have been diverting a huge amount of resources to clearing this debt, so it might impact on your ability to score in the future.

  2. A mortgage term between 10 and 25 years is like one day cricket. There are a lot of runs to be scored, and your mortgage is reduced reasonably quickly. The bowlers do get to put some pressure on you and get some reward for their hard work. But in the end you do end up winning as you have repaid your debt at a faster rate than normal.

  3. A loan term between 25 and 30 years is very much like test cricket. Lots of runs are scored, lots of interest is charged, and the bowlers are able to actually dictate the game in certain periods. The batsman can certainly further their statistics, and the support staff can go off and play some golf if they want. At the end of the game however, it can be a draw. You will have paid off your mortgage, but the bank has made a ton of money from the interest you have been charged, just like test cricket there is not always a clear winner.

So what mortgage term should you set?

The short answer is the one that you can afford. The shorter the term, the more expensive the repayment. Setting a short term is also problematic should your situation change. If you need to extend the loan term because of hardship, the bank may look at you as a default risk and make it difficult for you to continue.

On the flip side if you set your term at the maximum, and divert any extra savings you have into it periodically (when you facilities are on a variable contract), you can shorten the loan term by default. This does take some serious self-control so that you don’t spend the money while it is sitting in savings, but helps you reach the same end goal.

Ideally, you would be able to set your loan term at 30 years and pay extra over that time so that the effective term is significantly reduced. One major lender does allow you to does this. Thy allow you set your repayments for the fixed term you choose at an extra $1,000 per month on any facility. If you hit real financial hardship, they allow you to revert to paying the minimum principal and interest amount on your original 30 year term.

This path allows you to take advantage of the best of both worlds: pay the loan off faster and having a backstop should anything go wrong financially. If you can pay off more each month and protect yourself from catastrophe, then this is the lender for you.

Just like cricket, when choosing a loan term you have plenty of options... It's just a matter of choosing the game, length and intensity that you want to play.