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How much home loan is right for you?
One of the biggest attractions of an investment in property is the fact that it is relatively easy to gear the purchase – that is, to use someone ease’s money to cover most of the purchase cost.
Lenders are happy because their loans are secured by bricks and mortar assets and, for the borrower, there is always the chance of a quick gain from rising property prices.
Consequently, borrowers are often tempted to go for the highest possible gearing ratio, with a low deposit and a high proportion of the property cost borrowed.
“But borrowers need to consider that a bigger deposit generally means a better chance of a home loan at the most favorable interest rate, and that the loan can be paid off or at least reduced more quickly – which means that the property owner will have a bigger capital gain when the time comes to sell.”
Before they go house hunting, potential buyers also need to determine what size loan they themselves feel comfortable about repaying.
“Financial institutions will determine the maximum they are prepared to lend based on the borrower’s credit record and current income and debt commitments, and with interest rates currently so low, borrowers may well find that they qualify for bigger loans than they anticipated.
“This does not necessarily mean, however, that they should immediately opt for a more expensive property or a higher gearing ratio. Determining what size loan is right for you remains a personal decision and should take into account your overall investment strategy as well as the property in question.”
The buyer of a newly built property, for example, may need less cash to cover transfer costs or improvements and be able to put down a bigger deposit, while the buyer of an older home may decide to take a bigger loan and keep some cash in hand to cover the costs of repairs and renovation.
“In general, though, it is good advice to put down the biggest possible deposit and keep the amount borrowed to the lowest level.
“And the final decision should only be made after careful consideration of the probable future trend of interest rates and after shopping around to ensure the best possible current rate on the loan.”
Here’s some calculators to help you make the right decision:
Increased Installments Calculator
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