A home loan means a number of things, firstly it means you can move into a home you can call your own. But lets face its really the banks house until you have paid of your mortgage.
A lot of people get a mortgage and pay the required amount until it is paid off. But these days most lenders offer a revolving credit or flexible home loan. This type of loan lets you make additional payments without a penalty and best of all, lets you take back those extra payments should you need it in a hurry.
Comparison between a standard mortgage and one with a revolving credit component – (Note the minimum payments stay the same)
$300,000 Min monthly payment of $1,798 and rate of 6%pa = Total interest cost $347,514
$300,000 Min monthly payment of $1,798 and rate of 6%pa
but utilizing surplus cash in budget of $351 per month
towards reducing revolving credit balance = Total interest cost $215,830
An estimated saving of approx $100,000
I have been working with clients over the years helping them to get into mortgages. But surprisingly I have found very few lenders who sit down with a client and go through cash flow projections. Also what is interesting is that most clients will jump into a mortgage without preparing a budget. A lot of people focus on the payment and if they feel they can make it, jump right in.
The first thing you should do when getting a home loan is to prepare a budget and breakdown all your expenses. Figure out how much you will have left over after paying all your bills including entertainment and your mortgage repayment. Don’t forget to add in an allowance for that holiday or car.
The second thing you should do is ask how much interest you may end up paying over the term of the loan.
Deciding on the structure
The surplus figure from your budget will give an indication of how much you can make in extra repayments, this will help you decide how much of your home loan you should leave on a revolving credit or flexible facility. For example lets say after all your bills you have $200 left over per month or roughly $50 per week or $2,400 per annum and you decide you want to fix your home loan for 3 years. Now $2,400 times 3 is $7,200, so in effect you think that in the next 3 years you can make $7,200 worth of extra payments, great. OK lets also say you have another $10,000 in savings that you want to keep as emergency funds and not as a deposit. I would then suggest that we place at least $17,200 of your home loan on a flexi facility or a revolving credit.
The important thing here is that should you need to use $12,000 for an emergency in 2 years time, you really need to have access to it, without asking for another loan. A home loan on a variable rate will let you do this if it is a revolving credit home loan.