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Mortgage repayments: What will your property’s mortgage really cost you?

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Do you know how to work out your monthly mortgage repayments? How will your repayments change when interest rates change, and more importantly can you afford the mortgage when rates change?
Keen on making a deposit on your new home or making extra payments every month? What difference will these extra contributions make to the deal?
These are some of the more important questions to consider when buying a new property. In actual fact, the answers may be critical for making “buy” or “no-buy” decisions, especially when it comes to building a property business.
As you well know, you can purchase property in one of two ways. Use your own money or use other peoples’ money, in the latter case a financial institution (typically a bank).
Most people opt to use the banks’ money, and if you go with a loan you must know what you are getting into particularly from a repayment perspective.
I’d like to take you through a quick tutorial to help you answer the opening questions. All you need is a simple calculator which I’ve attached to this post and a basic understanding of mortgage repayments.
So, before continuing, download the Excel spreadsheet and then have a look at the example below.
Suppose you would like to buy an investment property for $100,000. As you do not have the cash on hand, you approach your local bank for a loan. The bank insists that you pay a 10% deposit ($10,000) given your credit score and affordability. Luckily you have the $10,000 in your savings account.
After negotiating directly with the credit manager, the bank decides to give you a loan of $90,000 and charge you interest of 8% over a 30 year period. Before signing on the dotted line, you quickly proceed with your own analysis. Details of the deal are as follows:
 mortgage repayments input 1 
►Question 1
What will the bank charge you on a monthly basis? This is a ‘biggie’. According to the deal, you will need to pay $660 every month over a 30 year period, assuming the interest rate remains the same. So far so good. Your budget allows for an $800 commitment.
Now for the interesting bit. After 30 years, the bank expects you to repay the $90,000 loan. But that’s not the amount you’re going to pay. You will pay a whooping $237,740! That’s more than 2.5 times the loan you were given.
 mortgage repayments input 2 
Why is this? It’s simple. The bank is out there to make money. They take their cut by charging you interest and in this case, you must fork out an extra $147,740 ($237,740 minus $90,000) over and above the loan. Pretty, isn’t it?
►Question 2
Now, what will happen to your repayments if interest rates change tomorrow? Instead of 8%, punch 10% and then 13% into the interest rate field.
 mortgage repayments input 3 
 mortgage repayments 4 
You will notice that your costs jump to $790 with 10% interest and $996 with 13% interest. Your total mortgage payment also increases because the bank is charging you more. So as the interest rate increases, so do your total costs.   
Do you see the problem? Your $800 budget cannot support a 13% interest fee. It is essential that you gain an understanding of where interest rates are going and make sure that you have the necessary reserves in place. Many people get caught out when rates increase.
►Question 3
What if you didn’t need to make the $10,000 deposit? Suppose the bank did you a favour and granted you a 100% loan, i.e. $100,000.
 mortgage repayments 5 
Your repayment is $734 and total mortgage cost $264,155. As you have a bigger loan (i.e. $100,000 and not $90,000), your repayments will be more.
This could work to your advantage. Your repayments are still in budget and you get to keep the $10,000 savings, which must be used as a reserve if interest rates increase.
►Question 4
What if you wanted to make additional payments every month? Suppose you deposit and extra $500 into your mortgage account. What difference will this make?
 mortgage repayments 6 
You will notice two things.
  1. Your total mortgage cost drops to $127,116 which is quite a big difference than the original $237,740 commitment.
  2. Your loan will be repaid in a shorter amount of time, in this case 110 months or about 9 years. The point is it pays to pay extra.
There you have it, the basic anatomy of mortgage repayments and with it some decision making on your part:
  • Can your budget support the deal with changing interest rates?
  • Do you want to or have to pay a deposit? What effect will this have on your finances?
  • Can you make extra payments every month? Do you want to or can you make better use of the spare cash?
mortgage repayments.xls198.5 KB

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