When borrowing for a home loan less is often better. The less you borrow, the less you have to pay back to the bank.
There are certain circumstances when it makes sense to borrow a little more than what you need. This can allow you to keep back some of your savings for planned future events.
If you’re planning on going through a short term decrease in income it can be a good idea to keep some cash back. The most common reason for this is when a family units income reduces due to having children.
By borrowing more you can put less of a deposit into buying your home. This can give you a buffer to help make your repayments until both parents have returned to work.
If you’re planning on doing some renovations it can be worthwhile budgeting for this at the start. By borrowing more, you can keep back some of your savings. This way you already have the funds needed to complete any necessary works.
It can be easier to borrow the extra funds for buying, than to go back to the lender for more money at a later stage. It’s important to note that structural renovations do need consent from the lender.
With many lenders, the more you borrow, the better interest rate you get. If you’re close to a better interest rate tier it may be worthwhile borrowing a little more to get the lower rate.
For example, you may have been only planning on taking out a $490k loan. But by borrowing $500k you’d save -0.10% off your interest rate. You might look to borrow the little bit extra to get the better rate, and put your excess funds back into the loan.
By borrowing more you get the advantage of the better interest rate. But by paying it in to the loan you don’t end up paying interest on money you didn’t need!
It’s important to consider your loan-to-valuation ratio when doing this. If your borrowings push you above an 80% loan to valuation ratio you may need mortgage insurance. The increased costs of mortgage insurance would likely negate any interest rate savings.
If you’re looking for a home loan please get in contact with us.
We can run the numbers on repayments, and estimate the savings you’ll need to buy your next home. When doing so we can also discuss with you your needs to keep any cash back for future events.