What kind of home loan repayments are right for you?
For the month of January 2019 alone Australian Bureau of Statistics data shows housing lending in Australia almost topped $65 million. If you’re thinking of getting on that ladder then it’s essential that you plan your loan and repayments in a way most suitable to you and your needs.
We’ve whipped up a quick a summary of the basics when it comes to the options for your mortgage repayments.
Principal and interest: aiming to own
This kind of home loan repayment will necessitate paying off the amount that you have borrowed as well as paying interest. This usually occurs over an agreed term of between 15 and 25 years with the goal of eventually owning the home outright. A Reserve Bank report shows that around 60 per cent of home loans in Australia are principal and interest.
This is the most common loan type in Australia as it is inherently less risky than many other loan types.
Principal and interest: Short term or long term?
When establishing a principal and interest loan it’s essential to give serious consideration to the repayment duration of your mortgage. There are two important things to consider here:
- How much can I afford to pay?
- How quickly can I pay my loan off?
These are essentially two parts to the same question. When figuring out how much you can repay per month it’s essential that you consider all of the extra costs, and leave wiggle room for the unexpected. If you repay at the very limit of your means, one surprise expense could derail your ability to repay your mortgage. Making extra repayments, when possible, can give you some financial buffer room as well. On the other hand the sooner you repay your mortgage the less interest you’ll pay and the quicker you’ll own your home outright.
To give you an idea of how much your repayment length can affect the amount of interest paid let’s have a look at a loan of $500,000, with a 5 per cent interest rate. Over 20 years this will cost you $291,947 in interest repayments. Extend this to 30 years and you’ll pay $466,279.60. That’s a difference of over $170,000.
Interest only: pay less own less
An interest only loan is exactly what it sounds like. You’ll only make interest repayments (not principal): a strategy that often appeals to investors. Reserve Bank data shows that a shockingly high 40 per cent of loans are structured in this way.
CoreLogic RP Data can help illuminate the motivation behind these loans.
The research company notes that property in the capital cities generally gains value year on year – making property in such areas ripe for investors armed with interest only loans.
Interest only: Negative gearing
By paying interest only, you minimise your immediate expenses while still taking advantage of capital gains. This is where negative gearing comes in. Negative gearing means that you’re making a loss on your property – interest repayments exceed your rental income.
Once again this is a method for investors to take advantage of capital gains. Making a loss on your property also may have several tax benefits that will offset the tax you pay on your income.
There’s certainly a lot to mull over when it comes to how you should repay your loan. What’s right for you will depend on a variety of factors including what you hope to achieve with your home, your resources and even your lifestyle. Speak to us about your options and we’ll be able to tailor a loan and repayment plan to you personally. That way you’ll be happy at home quicker than you can say capital gains.