When looking at your borrowing power in the context of a home loan application, banks will typically use a home loan interest rate up to 3% higher than the actual rate. Put simply, this is to make sure you could still afford your home loan repayments and interest charges if interest rates were to change dramatically. So, when calculating your home loan repayments, you may want to check your desired home loan size against:
This will help you figure out if you can ‘truly’ afford a home loan of that size and afford continuing to service it in the event of significant interest rate changes.
Depending on your financial needs and priorities, you may have opted for a smaller loan term, say 15 or 20 years. However, you may want to experiment with longer loan terms of up to 30 years, as this will typically leave you with smaller repayments stretched over a longer period of time. While you won’t necessarily service the home loan for the full 30 years, opting for a longer term can make budgeting and managing your cash flow slightly easier.
You may also want to explore the merits and sizes of various different repayment frequencies. While the long-term differences won’t be huge, you may want to find out whether more or less frequent repayments will better suit your budget and cash flow preferences, and if you may even save a small amount in the long run.
As mentioned, our loan repayment calculator will show you, based on the parameters you input, the minimum required repayments on your hypothetical home loan. However, if you have a variable rate home loan (or a fixed rate that allows additional repayments), making extra repayments towards your home loan could shrink your repayments over time.
This is because paying down your principal at an accelerated rate will generally reduce your total interest payable over the life of the loan, which in turn means your home loan will potentially cost you less overall.
This tip also applies to making lump sum repayments – if your loan allows them, even a modest lump sum could make a big dent!
Shifting to a more frequent repayment frequency won’t make your regular repayments cheaper, but it will make them smaller. So, while two weekly repayments will generally add up to just about the same as one fortnightly repayment, you may find that a smaller, more frequent repayment is easier to manage, or is better-suited to your financial situation.
That being said, making more regular repayments can help you pay off your home loan quicker.
A mortgage offset account is a type of transaction account which is linked to your home loan. The balance of this account is then offset against your home loan balance, meaning interest is charged on a smaller overall figure. This reduces your interest repayments, and subsequently the overall size of your home loan repayments.
For example, if you had $400,000 outstanding on your home loan and $50,000 in your offset account, you would only be charged interest on $350,000 of that loan amount.