Affordability, affordability, affordability
Any regular reader of the Reventon blog will know that affordability when it comes to home loans is a key part of good property investing. But the question of how much you can afford isn’t as simple as you might think. Of course, you can look at your current finances and shop around for a mortgage deal, but any sensible investor should also consider the future, and determine a comfortable level of repayments should circumstances change. How your life looks now may be very different in five, ten, or twenty years (relationships, children, employment) so its key to future proof.
How much should you borrow?
With this in mind, an important step of your property investment journey is to plan how much your home loan repayments could be depending on the amount of money you borrow, and the terms that come with it. When researching home loans affordability, it’s all in the details – and there are four key details that will make a huge difference.
1. Loan type
There are two common types of loan: variable or fixed rate. The interest rates on variable loans follow a base rate, which fluctuates with the economy. This means that your mortgage repayments will fluctuate with them, but you may get a good deal if the base rate is low. Fixed rates are just that – fixed, so you will know exactly how much your repayments will be each month. Generally, you can find two, three, five, or sometimes ten year fixed rate mortgages until the loan switches to variable.
2. Loan term
Your chosen loan term will have a big impact on your finance; if you opt for a short loan term, your loan payments will be much higher and therefore you may have to make some lifestyle changes to make your repayments. If you opt for a longer loan term, you will have much lower repayments, but you may find that over the loan term you’ll be paying much more in interest overall. It’s generally advisable to determine how much you can afford each month and calculate a loan term accordingly. To talk about affordability, we recommend you seek advice from a professional.
3. Interest rate
It’s always preferable for the interest rate on your home loan to be as low as possible. In Australia it is usual to find interest rates between three and five per cent, but this will vary greatly depending on the other terms of your home loan (for example if you have sought a high fixed rate period, your interest rate will likely be higher). When shopping for loans, beware of deals with initially tempting low interest rates, which on closer scrutiny you may find will shoot up once your fixed term ends.
4. Principal or interest-only?
This is one of the biggest questions you should yourself when considering a home loan. Repaying the principal on your home loan means that each month, you’ll be buying a small part of your property (along with paying the interest that goes with the loan) from the lender. At the end of your loan term, you will own your property outright and can enjoy either living mortgage free, or you can sell up and enjoy the cash. With interest-only loans, you won’t be paying off any of the principal, just the interest. This means that when you get to the end of the loan term, you’ll need to come up with another way to pay the lender. Usually this means selling the property, unless you have accrued another means of paying off your loan. Interest only does have its plus points – particularly if you live in a high growth area and you can benefit from the increased equity in your home – however it should be approached with great caution.
Use a tool
Whether you have an idea of the terms you’ll be looking for in your new loan, or you’re just scoping your ideas, it’s useful to use an online calculator so you can see how it all fits together. At Reventon, we have developed a suite of financial tools that can help you in your property investment planning process. Our loan repayment calculator can tell you exactly how much you will be spending on your home loan, depending on the terms above. You can use sliders to adjust any of the figures and gain real-time updates on how this will impact your regular repayments and total loan spending.
To benefit from this essential planning tool, visit the loan repayment calculator now. If you’d like more information or support on finding the perfect home loan that will work for you today and in the future, get in touch with our team for a free consultation.