Housing affordability depends on how your loan is structured as much as on the price of the property. For Ballajura buyers in Perth's north-east, a few decisions about repayment type, rate type and savings can change what a home loan costs each month.
This article covers the choices that have the most effect on affordability, and the trade-offs that come with each one.
What Makes a Home Loan Affordable?
A home loan is affordable when the repayments fit comfortably within your budget and still leave room for living costs and savings. The loan amount, the interest rate, the loan term and the features attached to the loan all shape that number.
As an illustration, a $500,000 owner occupied home loan over 30 years at an example rate of 6.75% p.a. has monthly repayments of about $3,243 on a principal and interest basis. That rate is illustrative only. Your actual rate depends on your deposit, your income and the lender. You can test your own numbers with our mortgage repayment calculator.
How Does Borrowing Capacity Affect What You Can Afford?
Borrowing capacity is the maximum a lender is willing to lend you, and it is not the same as what you can comfortably repay. Lenders assess your income, debts, living expenses and credit history, so the same buyer can receive different results from different lenders.
Credit card limits are a common example. Lenders usually assess the limit rather than the balance, so closing an unused card before you apply can lift the amount you can borrow. Our page on borrowing capacity explains the factors lenders weigh. Aim to borrow an amount you could still repay if your budget tightened, rather than the full amount offered.
Principal and Interest or Interest Only: Which Lowers Repayments?
Interest only repayments are lower than principal and interest repayments for the same loan, because you are not reducing the loan balance. The trade-off is that the balance stays the same, and when the interest only period ends you repay the full loan over a shorter remaining term, which raises the repayments.
At the example rate of 6.75% p.a. on $500,000, interest only repayments are about $2,813 a month, compared with about $3,243 on principal and interest over 30 years. Principal and interest reduces your loan balance, which builds equity faster than interest only. Our first home buyers page covers what to consider at this stage.
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Offset Account Example: How Savings Reduce Interest
A linked offset account reduces the balance your interest is calculated on, without locking your savings away. Money in the account stays accessible, and every dollar in it offsets a dollar of the loan when interest is worked out.
Consider a couple in Ballajura with a $500,000 loan at the example rate of 6.75% p.a. They keep $40,000 of savings in a linked offset account instead of a standard savings account. Interest is now calculated on $460,000, not $500,000. At the illustrative rate, that is about $225 less interest each month. They keep making the same repayment, so more of it goes towards the principal and the loan reduces faster.
The trade-off is cost. Loans with an offset account can carry a higher rate or an annual package fee, and the benefit only applies while the money stays in the account. Compare the total cost of the loan with and without the feature before you decide.
Fixed, Variable or Split Rate: Which Suits Your Budget?
A fixed rate gives repayment certainty for a set period, a variable rate can move up or down, and a split loan combines both. The right mix depends on how much certainty you need and how much flexibility you want.
Fixed rates can limit extra repayments and may involve break costs if you leave the loan early. Variable loans usually allow extra repayments and offset accounts, but your repayments can rise if rates increase. A split rate loan lets you fix part of the balance for stability and keep the rest variable for flexibility. If your fixed term is ending, our fixed rate expiry page explains your options.
Lenders Mortgage Insurance and Your Deposit
Lenders Mortgage Insurance (LMI) is a one-off cost that can apply when your loan to value ratio (LVR) is above 80%, and it protects the lender, not you. It can usually be added to the loan, which means you pay interest on it.
Saving a larger deposit can avoid LMI, but waiting also has a cost if property prices rise in the meantime. Some buyers are better off buying sooner with LMI, and others benefit from waiting. A broker can model both paths for your situation. Government schemes may also affect the numbers, so check current eligibility with the relevant WA or federal agency.
Why Get Home Loan Pre-Approval Before You Search?
Home loan pre-approval tells you how much a lender is likely to lend, so you can search for properties in a realistic range. It is not a final approval, and it can lapse or change if your finances or the lender's policy change.
A pre-approval also gives you a chance to compare lenders and fix problems early, such as a high credit limit or a missed payment. If you already own a home, a loan health check or a look at refinancing can show whether your current loan is still suitable. Our team also provides mortgage broker services in Ballajura and can compare home loan options from banks and lenders across Australia.
To see how these choices apply to your budget, call one of our team or book an appointment at a time that works for you. You can also read about our home loans before you speak with us.
Frequently Asked Questions
What makes a home loan more affordable?
The loan amount, interest rate, loan term and features such as an offset account all affect affordability. Choosing a loan you could still repay if your budget tightened is the safest starting point.
Does an offset account lower my interest?
Yes, it reduces the balance your interest is calculated on. In an illustrative example at 6.75% p.a., $40,000 in offset against a $500,000 loan cuts interest by about $225 a month, though some loans with offsets carry a higher rate or fee.
Is interest only cheaper than principal and interest?
Interest only repayments are lower in the short term, but you do not reduce the loan balance. When the period ends, repayments rise because the full loan is repaid over a shorter term.
When does Lenders Mortgage Insurance apply?
LMI can apply when your loan to value ratio is above 80%. It is a one-off cost that is often added to the loan, so you pay interest on it.
