What is loan repayment?

Loan repayment in Australia is the regular return of borrowed funds, plus interest, to the lender over the life of a loan. Repayments are usually scheduled weekly, fortnightly, or monthly, with the amount calculated to repay the full principal and interest by the agreed loan term.

Most Australian home loans use principal-and-interest repayments structured as an amortising loan. Each repayment covers some interest charged on the outstanding balance plus some principal that reduces the balance. Early in the loan, most of each repayment is interest and only a small portion is principal. Toward the end of the loan, the balance is small so the interest portion shrinks and most of the repayment goes to principal. A 30-year, 500,000-dollar home loan at 6 per cent interest would have monthly repayments of about 3,000 dollars, with total interest paid over the life of the loan of around 580,000 dollars.

Several strategies can shorten a loan and reduce total interest. Making repayments more frequently (fortnightly rather than monthly) results in 26 fortnightly repayments per year instead of effectively 24, equivalent to one extra month of repayments and saving years on a long loan. Extra repayments above the minimum reduce the principal directly and the interest charged on it from then on. Offset accounts, where the balance of a linked everyday account reduces the loan balance for interest calculation, achieve a similar effect while keeping the funds accessible.

Borrowers in financial difficulty have specific rights under the National Consumer Credit Protection Act 2009. They can request a hardship variation from the lender, which might include a temporary repayment pause, reduced repayments, or extending the loan term. Lenders must consider the request and respond within 21 days. If the lender refuses or the response is unsatisfactory, the borrower can complain to the Australian Financial Complaints Authority (AFCA), which can make binding decisions. Free help is available from financial counsellors through the National Debt Helpline (1800 007 007). Defaulting on a home loan can lead to repossession and forced sale of the property, but lenders typically work with borrowers for several months before taking that step.