When looking to buy a house, it’s nearly a foregone conclusion that you’ll need a home loan to do it. So what are some of the benefits and drawbacks?
The Great Australian Dream isn’t about having a home loan. It’s about owning a home. However, without a home loan, it’s hard to make this dream a reality.
With this in mind, weighing up the pros and cons of a home loan can seem a bit irrelevant. It’s highly unlikely you’ll achieve your goal of homeownership without one. But a look at the benefits of a home loan versus its drawbacks can demonstrate that they’re more than just a necessary evil.
The drawbacks of a home loan
We’ll start with the negatives first. While home loans might be a necessity, that doesn’t mean they’re without their disadvantages.
- They’re costly: It’s hardly news that home loans can cost a lot, but the amount you actually pay in interest can be surprising. If you have a $500,000 home loan over a 30 year term at 5.50% interest, you’ll be paying a total of $1,022,020.20 over the life of the loan. More than half the amount you’d end up paying would be interest payments. Despite this, there are options to help you minimise the cost. By choosing a home loan with an offset account or one that offers unlimited extra repayments, you can knock both years and thousands upon thousands of dollars off the cost of your home loan.
- They’re a big commitment: When you’re approved for a home loan, you’re taking on a decades-long commitment. Most home loans carry a term of between 25 and 30 years. This means that you’re likely to have a mortgage for a significant portion of your life. It also means that things might be a bit more complicated should you decide to pick up and move house. For this reason, it’s wise to look into home loans that offer portability.
- They carry some risk: Circumstances can arise that could make it difficult for you to keep up with your home loan repayments. Unforeseen life events like illness, unemployment or divorce could put you in a tough financial spot and having the obligation of a home loan could further complicate matters. However, most lenders are sympathetic to events like these and are happy to work with you to get back on track. If you do run into financial trouble, here’s some advice on how to keep on top of your home loan obligations.
The benefits of a home loan
Now that we’ve gone through some of the negatives, let’s look at the positive features of a home loan. While having a mortgage might not be high on your list of homeownership dreams, home loans do carry some significant benefits.
- They make homeownership possible: This is the major advantage of a home loan. Very few of us have the cash on hand to purchase a property debt free. Without lenders willing to extend a loan, homeownership would be out of reach for most people.
- The return on investment often outweighs the cost: While the property market ebbs and flows, over the long term, property prices tend to appreciate. A study by the Reserve Bank found that Australian property prices increased by an average of 7.25% per annum from 1985 to 2015. In most cases, borrowers who hold onto their homes for a significant period of time will see the appreciation in value outweigh the cost of their home loan.
- They’re a form of forced savings: Left to our own devices, many of us find it difficult to stash money away in a savings account. For those of us who have a hard time saving, home loans offer a way to build up wealth. When you make regular repayments on your home loan, you’re building up what’s known as equity. This is the difference between what you owe on the principal (the original amount you borrowed for your home loan) and the value of your home. Home equity is its own form of savings. The equity in your home can even be used for a deposit should you decide to buy a second property as an investment.
- They offer useful features: Many of the features offered by home loans help to mitigate some of the drawbacks we mentioned above. A home loan offset account, for example, offsets the amount on which you’re charged interest by the amount you hold in the account. Home loans that allow extra repayments give you the opportunity to pay off your home loan sooner. Home loans that offer portability allow you to move your loan from one property to another should you decide to move house.
While home loans do represent a big commitment, and often an intimidating one at that, it’s clear to see that the advantages do outweigh the costs. If homeownership is your dream, a home loan will help you see that dream become a reality.