❓ Keen for perspectives on this ❓ Short vs Long term home loan ❓
Recent article "warnings" that home loans used to be only 25 years, then 30 years, now 40 years - warning to "stay away! It's a trap!". Fair enough on one hand.
One concept I do discuss with clients is about their personal discipline and the future value of money. It's the percentage of household income needed to cover loan repayments, over time.
Here's the logic:
💵 Starting household income = $150,000
In 30 years (income increase modestly 3.5% p.a.) = $400,000+ household income
$700,000 home loan, 6% rate, 30 years, P&I:
💸 Starting repayment = $4,200 per month
Repayment in 30 years = $4,200 per month (no change, all else being equal)
❓ How much of the household income is needed to make minimum repayments:
Starting proportion of income = 33.6%
Repayment in 30 years' time = 12.4%
Repayment in 40 years' time = 8.1%
This comment is NOT advice or a recommendation for anyone to take a longer loan term. Just a perspective.
The reason I discuss with younger couples is understanding future value of money plus power of using personal discipline to achieve a goal. And get their brain juices flowing? Can they be disciplined? Will their income grow faster? Will they increase repayments as their income goes up? If so, could house pay off sooner? Mission accomplished? Goal achieved? Delaying gratification along the way?
PS - a house worth $900,000 today should be worth $5.5M+ in 30 years, using the long term 6.4%p.a. value increase.
The point is this: we're here to educate, inspire and provide good consumer outcomes. If a client understands this mission and works toward it, I would love to look back in 30 years and say I've been a small part of that.
But it's always up to them.
Credit Representative Numbers 521733, 550284 & 547037 are authorised under Australian Credit Licence 389328
