Loan Duration

Discussion in 'Loans & Mortgage Brokers' started by AbleTasMan, 4th Mar, 2020.

Join Australia's most dynamic and respected property investment community
Tags:
  1. AbleTasMan

    AbleTasMan Well-Known Member

    Joined:
    22nd Feb, 2020
    Posts:
    74
    Location:
    Tasmania
    Is there any benefit in initially taking out a home loan for a shorter period of time? like 20 or 15 years?

    Or should you just take out a 30 year loan, and then just put a heap more money into it whenever you can to pay it off sooner (as most loans have no penalties on paying off extra).

    I'm struggling to see why you'd take one out for a shorter time if you can just pay more at any time and have it paid off sooner anyway. Am I missing something?
     
  2. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

    Joined:
    15th Aug, 2005
    Posts:
    7,534
    Location:
    Gold Coast
    This is often but always the best approach

    Borrow over the longest term, and pay it down asap, assuming it wont EVER become an IP.

    Some Exceptions to this are:

    • Folks that arent good with money - a shorter loan term can be useful as forced savings should they have discretionary cash to burn.
    • Approaching retirement - many lenders wont run a PPOR loan term beyond 65 to 70 depending on the borrowers work type.
    • Many commercial facilities have max loan terms of 15 years.

    ta
    rolf
     
    Brady likes this.
  3. Lindsay_W

    Lindsay_W Well-Known Member

    Joined:
    1st Jul, 2015
    Posts:
    2,456
    Location:
    QLD
    Each to their own, some like to have a shorter term, why does it concern you though?
     
  4. Peter_Tersteeg

    Peter_Tersteeg Well-Known Member Business Member

    Joined:
    18th Jun, 2015
    Posts:
    6,324
    Location:
    Here.
    My thoughts are that a longer term contracts you to a smaller minimum payment. There's nothing stopping you from nominating a larger payment, but this is at your discretion.

    If some bad life event happens, it might be useful to be able to have the option of a smaller repayment for a period of time. You can later go back to larger repayments on your terms.
     
    Jess Peletier and Brady like this.
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

    Joined:
    9th Jun, 2006
    Posts:
    30,841
    Location:
    Australia wide
    Perhaps if you can't control you spending a short term may be worth considering as a form of forced savings
     
  6. Scott No Mates

    Scott No Mates Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    20,326
    Location:
    Sydney or NSW or Australia
    Both have associated risks, advantages and disadvantages some highlighted above.

    The longer the term equates to a lower monthly repayment but a greater quantum of interest payable to the lender vs short term resulting in less interest paid, higher monthly repayment but there may be the option to extend the term of the loan.
     
  7. Peter_Tersteeg

    Peter_Tersteeg Well-Known Member Business Member

    Joined:
    18th Jun, 2015
    Posts:
    6,324
    Location:
    Here.
    Extending the loan term requires a new application. If you're under financial stress, you may not be in a position to qualify for a new loan.

    Better solution is to take the longest loan term you can get right from the start. Nominate the highest direct debt payment you can afford (or commit to a savings program in your offset account, whatever your circumstances dictate).

    Changing a direct debit amount is a lot easier than qualifying for a new loan.
     
    Brady likes this.
  8. property_geek

    property_geek Well-Known Member

    Joined:
    31st Jul, 2015
    Posts:
    233
    Location:
    Australia
    Is it true for refinances as well? Is it a good strategy to take out for full 30 years on refinance assuming I am good with savings and don't need forced savings.
     
  9. Peter_Tersteeg

    Peter_Tersteeg Well-Known Member Business Member

    Joined:
    18th Jun, 2015
    Posts:
    6,324
    Location:
    Here.
    The longer loan term gives you the option of how quickly you pay it off, so there's merit in taking the longest available term for any type of loan.

    In the case of refinances, you may want to consider how long you want the debt to be in place for and also weigh that up against your strategy and savings discipline. If you are good with savings, then take the 30 year loan on a refinance and make extra repayments regularly. If you're a terrible saver, then perhaps you would be better off to match the new loan term to the remaining loan term.

    There's plenty of ways to look at this, but they require you to understand your strategy and be objective about your ability to execute that strategy and manage your money.
     
  10. Peter Pakarinen

    Peter Pakarinen Member

    Joined:
    4th Mar, 2020
    Posts:
    23
    Location:
    Kogarah NSW
    Some lenders will only do a 30 year term. Also you may find that by opting for a shorter loan term you may not meet lender servicing. This will also affect your borrowing if you were to buy a 2nd property. Generally i would always recommend a longer loan term and yes try and pay as much off as quickly as you can. Note: You can always shorten a loan term but you cannot increase it without putting in a new application.

    Cheers
    Peter
     
  11. AbleTasMan

    AbleTasMan Well-Known Member

    Joined:
    22nd Feb, 2020
    Posts:
    74
    Location:
    Tasmania
    All excellent advice! Much appreciated. It's exactly what I was thinking, but wanted to make sure for when I do go get a loan there wasn't any other incentives behind having a shorter time period. Taking out the 30y loan for a smaller minimum monthly repayment and then just topping it up with extra payments seems like a no brainer, almost best of both worlds.

    I'm a good saver and don't ever splurge, rarely eat out etc so this approach would work well for me. I could potentially make twice the monthly repayments some months when cash levels are up.
     
  12. AbleTasMan

    AbleTasMan Well-Known Member

    Joined:
    22nd Feb, 2020
    Posts:
    74
    Location:
    Tasmania
    A similar question I've been wondering, is there any benefit of making a larger than 20% deposit if you have the cash? Or is better to just make the 20% and then put the rest in as a voluntary payment?

    For example: House sells for $400K, person has $150K disposable they can use.
    Should I make a $80K deposit (20%), take out a loan for $320K, and then put the rest straight into the loan to reduce it to $250K?

    Or, make a $150K deposit (37.5%), and take out a loan for $250K?
     
  13. Peter_Tersteeg

    Peter_Tersteeg Well-Known Member Business Member

    Joined:
    18th Jun, 2015
    Posts:
    6,324
    Location:
    Here.
    Some lenders will give you better rates for lower LVR loans.

    Also the less you borrow, the lower your repayments will be, the sooner you'll own the property outright.

    There's plenty of reasons where one might be better than the other.

    I'm currently waiting for a property to settle using my own cash. [Technically my super fund is borrowing some money from me and using some of it's own money to purchase the property. I'm kind of being my own bank. It gives me all sorts of nice benefits.]
     
  14. AbleTasMan

    AbleTasMan Well-Known Member

    Joined:
    22nd Feb, 2020
    Posts:
    74
    Location:
    Tasmania
    Isn't in my example making the initial large additional payment lowering the repayments anyway? but without the risk of having to make such a large deposit?
     
  15. Peter_Tersteeg

    Peter_Tersteeg Well-Known Member Business Member

    Joined:
    18th Jun, 2015
    Posts:
    6,324
    Location:
    Here.
    Your minimum P&I repayment will be based on the initial limit. A large extra repayment doesn't change this, so your minimum repayments won't be lowered.

    Interest only loans reduce the periodic repayment by making extra payments (or offset account deposits), but after the IO period ends, the minimum P&I repayment is based on the original limit over the remaining loan term.

    Not sure what the risk of making a large deposit is, other than not having funds for other things. That's a judgement call you need to make. I had to wonder recently what sort of emergency a client was anticipating with a $400k 'emergency fund'.
     
  16. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

    Joined:
    15th Aug, 2005
    Posts:
    7,534
    Location:
    Gold Coast
    Different folks, diff risk profiles.

    Challenge or opportunity fund, aka war chest perhaps

    ta

    rolf
     
  17. Lindsay_W

    Lindsay_W Well-Known Member

    Joined:
    1st Jul, 2015
    Posts:
    2,456
    Location:
    QLD
    There's actually no difference between the two options, you're simply delaying the "larger Deposit" until you get the loan, which kinda defeats the purpose of gettting the larger loan in the first place.
    Things to consider;
    You can get cheaper rates for lower LVR loans,
    You may need that cash for other things, investments, emergency funds etc so it may pay to borrow 80% LVR and stick the remaining cash in an offset account so you have access to it when you need it while also reducing the amount of interest you pay on the loan.
     
  18. Peter Pakarinen

    Peter Pakarinen Member

    Joined:
    4th Mar, 2020
    Posts:
    23
    Location:
    Kogarah NSW
    As mentioned in other comments, best avoid lmi if you can. Some lenders such as HSBC OO have great rates up to 90% LVR (inc lmi). The only reason to hold more money is if you need it for a specific purpose. But a 1% initial slap for LMI is a big cost, especially when it can be avoided.
     
  19. Lindsay_W

    Lindsay_W Well-Known Member

    Joined:
    1st Jul, 2015
    Posts:
    2,456
    Location:
    QLD
    This is very true, eg. recently had a client buy PPOR at 90% LVR even though he had enough cash for a 20% deposit - his reasoning was that he could invest the remaining money for a far better return and therefore happy to wear some LMI cost - Fine if you can get that good return and that's what you want to do, as a stock broker his risk profile is different to average.
     
  20. AbleTasMan

    AbleTasMan Well-Known Member

    Joined:
    22nd Feb, 2020
    Posts:
    74
    Location:
    Tasmania
    Mainly based on thing's I have read, and things I have been wondering about.
    Like a contract or settlement gone bad, and you loose the deposit completely. Not sure how common it is, but it seems like it can happen. Loosing an $80K deposit isn't as bad as loosing a $150K or even $200K deposit.
    If I withdraw my offer, will I lose my deposit?
    Why a Home Seller Might Be Entitled to Keep a Buyer's Deposit
    Loss of 130k deposit for reasons beyond my control - Real estate
    With no cooling off period in Tas the risk is all on the buyer. So I would think smaller deposit = less risk?

    Also, I've looked at offer forms to see what's needed like this one: Letter of Offer Form | For Sale by Owner Properties in Australia | Sell Your Own Home and see that you have to list the deposit amount on there. I could be wrong, but wouldn't a seller see a large deposit amount and then up the price, thinking the buyer can afford to pay more? For example buyer offers $400K and puts down $200K as the deposit, isn't that more of an incentive for the seller to counter at a much higher price?