First home buyer considering options - open to advice

Thanks for taking the time to reply, I like that quote also! I don't necessarily compare myself to my friends, but the few that do own property (investments) I believe they have done so because, that's what you do, you buy a house - rather than as part of a careful strategy. But hey, I'm sure that works for people too.

 

Of all the kind people who have replied to me - does anyone have any input on the idea of going interest only for 2 years while on lower income, then going P&I once I'm back at full pay? I don't necessarily want to push for this, I'm just curious if this is a valid use of this loan feature?

 

Other people will be more knowledgeable on this im sure but what it sounds like youre asking is that will the IO loan improve your serviceability and/or should you get this to be able to afford a place.

I've done a quick breakdown below on re.com.au

On a $500,000 house at 4%ps (conservative) over 30 years P+I and with a $50,000 deposit you will be paying approx $2,281/mnth. (IO is about $1,600/mnth)

At $85kpa wage youre earning approx $5,485/mnth after tax, not including your partners wage. This leaves you roughly $800/wk for bills, food, going out, savings, whatever.

My question is why do you think you need to go IO when you should be able to confidently service this loan yourself? Not to mention your partner will tip in approx $600/mnth in rent and be splitting bills?

Disclaimer* Not a mortgage broker so have done a very brief assumption on cost of living, but really $800/wk after your mortgage is out of the way is plenty to work with, and i feel if you couldnt manage that you'd maybe need to reduce expenses, rather than focus on the future increase in wages.

Hope that helps

 

The way it works is if you apply for a 2 year Interest Only loan MOST (if not all) lenders will calculate your serviceability on the remaining P&I period.
So if you get a 30 year loan term with 2 years Interest Only - the repayments for serviceability will be calculated over 28 years.
This means your total borrowing capacity will be less than if you just had 30 years P&I loan.
You need to speak to a broker who can assess your ACTUAL borrowing capacity and give you some clarity regarding this - some great brokers have responded to you on this thread, might be worth getting in touch with one of them

 

It can be, especially if it will turn into an investment property later. Or if you buy it as an investment to start with. Many lenders aren't keen on IO for PPOR loans though, especially at high LVR's.

 

Thanks for the reply! I thought it would have been just manageable as well, with a good budget. Others on this thread told me I wouldn't be able to afford it.

 

You have to remember that your current wage of $150-200k pa is more than the vast majority of people in australia will ever earn, and that you pay cut/reduced wage to $85k is actually nearly $20-$30k above the average and median wages in australia. (Revealed: this is how much ordinary Australians really earn) In other words, you're killing it and youre on a pay cut!

I've heard stories of people on $40-$50kpa being financially better off that people on>$150k pa, its just what you do with it.

 

Also, **not financial advice or accurate breakdown of your position, go see a broker haha**

 

Absolutely, I'm extremely fortunate. At the same time I don't want to be lulled into a false sense of "oh it's no big deal, I can afford whatever."

 

Precisely, stick within your means and you'll be fine. Don't want to be over capitalised or in mortgage stress and find out youre going to pop one out in 9 months...

 

Haha I should hope not. But certainly a complicating factor down the track when I'm the breadwinner and do not get paid maternity leave.

 

Sorry to keep repeating myself but you really need to see a broker to work out what you can/can't afford.
Ketsle's calculations above are based on actual figures, lenders calculations are not the same. Eg. interest rate might be 4% in reality but the lenders test the serviceability based on an interest rate of 7.25%+ some even more, also even if you budget well and only spend $800 a month on all your living expenses the lenders will still apply a minimum monthly amount to your living expenses of around $1700 (example only) regardless of the fact you can show them you only live on $800 a month.

 

Of course. Just trying to put the feelers out for some basic info before taking the next step of speaking to a professional.

 

Agreed!

When I bought my first PPOR after stamp duty and LMI I had a 410k mortgage and was earning 50k and my partner was earning 40k. We had P+I repayments of $1852 a month. Since that time I've increased my salary to 80k a year and my partner now earns 55k a year and we are comfortably serving the mortgage.

I believe instead of going IO for 2 years you should go P+I. It will be forced savings. I do the same with my super contributions whenever I get a pay raise. The natural inclination of 99% of the population is to spend whatever you earn. However, if you lock it away (mortgage or super) before you can spend it then you are forced to live within your means and will adapt to your circumstances.

 

With IO repayments you can pay extra onto the loan with no penalty (assuming variable rate) So you can pay the P&I repayment $ equivalent and if you need extra cash flow for a month or two you can just pay the minimum repayment, it's a more flexible strategy. Simply using P&I repayments locks your cash flow in so to speak, if you need extra $ for a month or so well you'll have to find it elsewhere.
Just my 2 cents.

 

True. It worked for us because we've both never owned a credit card in our life so we're used to living within our means.

 

Of course you can pay extra on IO but the tendency of 99% of the population is to spend what they earn after paying tax. Personally I'm one of those people, which is why I always lock in a higher repayment with the banks and make additional after-tax contributions to super as it's 'forced savings' for me.

 

I applaud the sensibility of your posts.

IO still has it's place, but requires diligence. For me IO buys me options. I keep a category in my budget for principle payments, but remains cash on my books. The key is what do you do with it.