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How Money Works

The Mortgage Trap: How a $500K House Costs $900K

Ages 10–14 25 min read Intermediate

A mortgage is the biggest financial commitment most families make. Most don't fully understand the numbers.

Let's look at what a home loan actually costs. The numbers are eye-opening.

The Real Numbers

  • House: $600,000. Deposit: $120,000. Loan: $480,000.
  • Rate: 6.5%. Term: 30 years. Monthly: $3,034.
  • Total paid: $3,034 × 360 = $1,092,240
  • Interest paid: $612,240 — more than the loan itself.

Where Money Goes Early On

Month 1: of your $3,034 payment, $2,600 is interest (86%) and only $434 reduces the loan. After a full year of payments ($36,408), you've reduced the loan by just $5,400.

It takes 19 years before principal payments exceed interest payments.

The Extension Trap

Extending from 30 to 40 years saves $148/month but costs an extra $293,040 in interest.

Rent vs Buy

People say "rent is throwing money away." But in the first 10 years of a mortgage, 70% of payments are also "thrown away" as interest.

Tonight's Question

"How much will our family actually pay for our home by the end of the mortgage? How much of that is interest?"

Follow-up: "What would an extra $100/month save in interest and years?"

Mortgage Calculator Experiment

Go to moneysmart.gov.au mortgage calculator.

  1. Enter $500,000 at current rates, 30 years.
  2. Note total interest.
  3. Change to 25 years — how much saved?
  4. Add $200/month extra — how many years cut?
  5. Try rates: 4%, 6%, 8%.

Small changes have enormous impacts over 30 years.

Go Further

  • Research: What is "negative equity"?
  • History: The US subprime crisis of 2008.
  • Australian: Current RBA cash rate and how changes affect mortgages.
  • Maths: Learn the amortisation formula.

What We Simplified

  • Most Australian mortgages are variable rate — the rate changes over time.
  • Property can appreciate, offsetting some interest cost.
  • Tax implications (negative gearing, CGT) affect real costs.

Sources

  • ASIC MoneySmart. "Mortgage Calculator." Link
  • RBA. "Cash Rate Target." RBA
  • ABS (2023). "Housing Occupancy and Costs." Cat. 4130.0.
  • Keen, S. (2011). Debunking Economics. Zed Books.

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