Home loan repayments - how much can I afford to repay?
If you’re thinking about purchasing a property, before you start eyeing off that penthouse suite the first thing you should think about is how much you can realistically afford to repay each month, as this will ultimately determine the amount you should borrow.
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Home loan repayments calculator
To help you figure out what kind of home loan repayments are within your budget, start by punching in your numbers into our home loan repayments calculator.
You can enter in different loan amounts to get an idea of how your home loan repayments could change, depending on the amount you are looking at borrowing. Just take a look at the table below to see how the repayments may differ on a mortgage with a 5% interest rate over 25 years:
|Loan amount||Monthly repayments|
Of course, the home loan amount isn’t the only factor when it comes to your ongoing repayments, as the interest rate could make a significant difference to your monthly repayment amount.
Scenario: Amanda is looking to take out a $600,000 home loan, meaning with a 5% interest rate her monthly repayments will be $3,508. But if Amanda was savvy and hunted down a mortgage with a low 4% interest rate, her ongoing repayments would drop to $3,167.
When choosing a mortgage you’ll have the choice of either a fixed or variable option, which can also affect your mortgage repayments. Here are some of the pros and cons of each to help you decide between the two:
pros: Your interest rate will be locked in for an introductory period of usually between 5-7 years, meaning your repayments will stay the same over this period.
cons: The rate you’ll receive will generally be higher than with a variable rate loan and if you try to switch providers before the fixed rate period comes to an end you may be charged a pricey break cost fee.
pros: You’re not only likely to receive a lower interest with a variable rate loan but more flexible features too like an 100% offset account, fee free extra repayments and redraw facility.
cons: Your interest rate will change according to the market, so you risk your rate increasing if your lender decides to lift their variable rates.
Home loan term
Another way to bring down your monthly repayment amount is to increase the term of the home loan.
Example: If Amanda is on a tight budget she could ask the provider if she could extend the loan term from 25 years to 30 years. Our repayments calculator shows this would reduce her monthly repayments from $3,167 to $2,864.
Later down the track, Amanda can always make extra repayments to reduce the life of the loan and the interest she pays.
Example: 5 years after taking out the mortgage, Amanda receives a work promotion and uses her extra repayments facility to put an extra $400 towards her home loan each month. This will reduce the life of her loan by 5 years and 1 month and she will save $74,239 in interest.
You should also think about how often you want to repay your loan e.g weekly, fortnightly or monthly. Remember not all home loans come with the flexibility to choose your repayment frequency, so make sure you add this to your home loan shopping list.
It’s a good idea to set up your repayments fortnightly rather than monthly as this will ultimately mean you’ll pay off an extra month at the end of the year. Say your monthly repayments are $2,000, over a year you will have paid back $24,000 but by setting up your mortgage repayments over 26 fortnights at the end of the year you will have paid $26,000.
As mentioned if you decide to sign up with a variable interest rate, there is a chance of a rate rise if the Reserve Bank of Australia decides to increase the official cash rate and your lender in turn lifts their variable rates as well, or your bank decides to increase their rates without the RBA.
So have a play with our rate change calculator to get an idea of what you’ll need to budget for if the market or your bank changes.
For instance, the below table shows if Amanda’s 4% rate lifted by 0.75% this would make her monthly repayments jump up from $2,864 to $3,130.
|Rate rise||Monthly repayments|
In the worst case scenario, the next table shows if Amanda had originally signed up with the higher 5% rate loan and had chosen the 25 year term her repayments would have jumped up from $3,508 to $3,775.
|Rate rise||Monthly repayments|
Interest only home loans
Another option that will really bring down your monthly repayments is opting for an interest only loan, which as the name suggests means you are only repaying the interest charged on the loan. Using scenario 1 of a 4% rate over 30 years, this would bring Amanda’s monthly repayments down to just $2,000 during the interest only period (usually 5 years). However, she will have to start paying off both the interest and principal after the interest only period comes to an, so Amanda will need to ensure she can afford the regular repayments after this period before she takes out the loan.
As you can see there are many factors that can influence your ongoing repayments, with Amanda facing anywhere between an ongoing repayment of $2,000 up to $3,775 with the same loan amount of $600,000 for each scenario. So always make sure you weigh up your options by having a play with our home loan repayments calculator to ensure you can comfortably afford your ongoing repayments over the entire life of the loan.
Tips for managing your mortgage repayments
- Take out mortgage protection: A good way of protecting yourself if an unforeseen event like an illness, injury, redundancy or divorce occurs is by taking out mortgage protection insurance, which will cover your home loan repayments for a set period of time.
- Offset account: It’s also wise to start setting aside money in an offset account attached to your mortgage. Not only will you reduce the amount of interest you pay through the offset facility but the money is easily accessible just like with an everyday bank account.
- Extra repayments: An alternative option to an offset account is putting any extra cash you have towards making extra repayments, which will mean when you run into a rough patch you’ll already be ahead on your repayments.
- Repayment holiday: If a time comes when you need a break from your mortgage repayments, due to events like job redundancy or maternity leave a repayment holiday may be the answer. But keep in mind, your lender may require you to have made extra repayments on your loan to be eligible for this option and you’ll also be charged interest over this period, so it should only be used as a short term solution.
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