A home is probably going to be the most expensive investment you’ll ever make. It’s also a major decision that will affect your finances and the well-being of your family for years to come.
Before a lender will approve you for a mortgage on your home, however, they will require you to prove you have the financial resources to repay the loan. This includes assessing your income and any ongoing financial obligations.
Also, if you’re buying a property with another person (such as a spouse or sibling), your repayment capacity may be greater (which translates into greater borrowing power). Our mortgage calculators are available.
The Home Loan Calculator can give you an estimate of your mortgage payments based on your loan amount and term.
Here are some factors that may impact your mortgage repayments.
Interest rates get a lot of attention from homebuyers, and with good reason, as they determine the cost of your home loan and what you’ll need to pay back each month. A small difference in interest rates could mean a significant change in your monthly payments.
The Reserve Bank of Australia (RBA) sets the “cash” interest rate, which is reviewed every month. Credit providers (including the Big Four Banks), can set their rates and adjust them for cash.
While interest rates have remained at unusually low levels for several years, it’s prudent to acknowledge that they won’t stay low forever and that even a small increase can significantly affect your repayments and lifestyle.
For example, if interest rates rise and you’re only making the minimum repayments on your home loan, then you’ll have to start paying more. If rates increase just 1%, you’ll have to pay an extra $190 a month on an average home loan of $300,000 payable over 30 years.
Home loans can have different interest rates. Each rate has its advantages and disadvantages.
Fixed rates
Fixed rates allow you to lock in an interest rate on your home loan for a period of time, usually between 1 and 5 years. This safeguards you from future interest rate increases and helps you plan your finances better as you’ll know exactly how much your repayments will be.
The major disadvantage to a fixed-rate home loan is that you won’t benefit from falling interest rates and there may be restrictions on making additional repayments. If interest rates have fallen, you may have to pay a large fee to terminate the fixed-rate loan.
Variable rates
Variable rates refer to the possibility that the interest rate on the loan could change due to changes made by credit providers, such as changes at the cash rate or any other changes.
The advantage of variable rates is that they usually (though not always) go down if the cash rate is slashed, which reduces the amount of interest you’ll have to pay. Variable rates don’t require additional payments. This is great news for people who want to pay their mortgage off quicker.
Variable rates are also subject to a rise in cash rates. This means you’ll have to pay more interest, which in turn increases your mortgage repayments. The cash rate isn’t increasing but it could rise.
Rates that are partially fixed
Split loans, also known as partially-fixed rate loans, allow you to pay both fixed and variable rates on a portion of your home loan. A fixed-rate $200,000 home loan could be paid with a variable $100,000 rate.
If you want the security of monthly payments, but the lower interest rate on the other part of the loan, a partially fixed-rate home loan may be an option. There are no restrictions on how many additional payments you can make to the variable portion.
You will have greater flexibility with a fixed portion of your home loan than with a fully adjustable loan. Variable interest rates will fall if they are lower. You may need to pay a significant break fee if you want to refinance your home loan or pay off the fixed rate portion.
Your loan-to-value ratio will affect your interest rate
LVR (loan-to-value ratio) can have an effect on your mortgage interest rate. LVR is the ratio between your mortgage amount and the property’s purchase price or appraised value.
The lender will generally accept higher LVRs. Lenders who have LVRs over 80% will charge higher interest rates. With this in mind, it’s important to calculate your LVR and work out what effect it would have on your repayments.
Lenders will require mortgage insurance if your LVR is higher than 80%.
Lenders mortgage insurance allows potential homebuyers to realize their homeownership dreams sooner than the 20% deposit required by banks or financial institutions. LMI allows you to borrow more than you would normally need. This allows you to purchase a property that requires a smaller deposit. LMI might allow you to borrow at a rate comparable to someone with a higher deposit.
Lenders might offer mortgage insurance, which could have an impact on your mortgage repayments. The way you settle the premium will determine how much. You can choose to pay your LMI upfront at the time of your loan settlement (which means you won’t have to make ongoing payments).
Alternatively, you could capitalise the premium into your home loan amount so that it’s paid off in increments. In other words, if the LMI premium cost is added to your home loan amount then your repayments may be marginally increased to pay for the LMI premium.
If you’re borrowing more than 80% of your home loan, LMI is a mandatory requirement, and your lender will require you to pay this before agreeing to lend you the funds. The amount borrowers have to pay will vary, and is based on the amount they need to borrow, how much deposit they’re able to provide, as well as their loan-to-value ratios.
LMI protects both the lender and the borrower. LMI protects the lender against loss if the borrower can’t afford the loan repayments and if their guarantor is unable to meet the obligation.
If you’re a first-time homebuyer, your home loan deposit is viewed as your “contribution” to the purchase price of the property. The amount of your deposit determines the type of loan you will be eligible for and the amount you can borrow to buy your home.
Lenders will also consider your ability to save over a period of time, regular rent payments, and other sources of income (such as a salary, dividends, or investments). All these work together to give the lender an indication of your ability to maintain your mortgage repayments and greatly determines how much money they’ll lend you.
Your deposit size may have an effect on the interest rates of the loan. A larger deposit will increase your negotiation power, and you can choose from many lenders. A larger deposit may qualify you for a discount interest from the lender. This can help you to reduce your monthly mortgage payments.
What’s more, a sizable deposit means you can borrow less from your lender and have less interest to pay over the course of the loan. This will decrease the amount of your mortgage monthly payments.
Whether it’s a bonus at work or a financial windfall such as a monetary gift or inheritance, making a lump sum repayment on your home loan could change your remaining home loan repayment picture significantly. You could get lower interest rates and a shorter loan term by paying a smaller amount to your home loan.
How can you save money on your lump-sum mortgage payments How much interest you pay will depend on how often you make your mortgage payments. The outstanding balance is used by most mortgages to calculate interest. They then charge you weekly or fortnightly or as per your payment schedule to recover that interest.
The bottom line: the more you contribute to your mortgage, the less interest you will pay. This will reduce your monthly mortgage payment. You’ll also be able to clear your mortgage debt more quickly.
Here’s a practical illustration of how a lump sum repayment can reduce your mortgage debt. Let’s say you have a mortgage of $500,000 at an interest rate of 7%. You are five years into the loan’s term, which is 25 years. A $10,000 windfall could be converted to a lump sum payment to lower your mortgage and save $29212.06 in interest.
With any amount, lump sum repayments can be made. In short, the greater the frequency of the payments, the more quickly you’ll be able to clear your mortgage debt and the less interest you’ll be charged.
Borrowers who aren’t locked into fixed-rate or partially-fixed rate home loans should consider making regular lump sum repayments. The Advanced Mortgage Repayment Calculator will show you how much extra you can save by making additional payments.
