Buying a new home can be exciting and confusing. There are many terms, figures, and details that first-time buyers may not be familiar with. These details include estimating your potential home loan repayments.
It is essential never to borrow more than you can afford. While there are various formulas for estimating how much you can afford to spend on monthly repayments, everyone has different needs and responsibilities.
Before you place an offer on a home, you should try to determine how much your repayments may cost. While insurance rates and your credit standing influence your monthly home loan repayments, there are a couple of other factors that you need to consider.
Lender’s Mortgage Insurance May Increase Your Repayments
If you do not have enough money for a large deposit, you may need to pay an additional fee to obtain a home loan. This additional fee is the lender’s mortgage insurance (LMI). The RBA has extensive details to explain LMI
When you borrow more than 80% of the property purchase price, lenders consider you a higher risk. They want to protect themselves in case you stop making your monthly repayments. The LMI offers this protection.
LMI is an insurance plan that covers the lender. If you default on your loan, the insurance company pays out to the lender.
LMI Can Add Thousands of Dollars to the Cost of Your Loan
Depending on the amount of your deposit and the purchase price of the property, LMI can add thousands of dollars to the total cost of your loan. For example, if you place a $15,000 deposit on a $250,000 property, you are borrowing 92.50% of the property price and may pay between $3,923 and $5,550 in LMI.
These payments may be settled at the end of the life of the loan. However, most lenders divide the cost of LMI into your monthly repayments. Find out how much mortgage insurance you may need to pay with this Lender’s Mortgage Insurance Calculator from Lendi.
The Total Amount and Term of Your Potential Home Loan
While the insurance rate and LMI may impact your monthly repayments, the most significant considerations are the total amount of the loan and the term.
For example, you will pay more each month when you choose a 20-year term compared to a 30-year term. To pay off the loan in 20 years, your monthly repayments need to be higher.
If you want your monthly repayments to be lower, you may need to borrow less money and select a longer term. The best way to reduce the amount of your loan is to save up additional funds for a larger deposit. If you can save enough for a 20% deposit, you will also eliminate the need to pay LMI.
Use these tips to estimate your monthly repayments. You should also ensure that you are not paying too much for your new home. Always work with a qualified solicitor or conveyancer when going through the home buying process.
There are also many online resources that can help you estimate your repayments. With a free LMI calculator and other financial tools, you can work out how much your potential home loan may cost to repay each month.