Why buy a home? Part 1 – How a mortgage works

A lot of young people (and not so young) do not own property. This series of articles will show some of the reason why you might decide to save a deposit and purchase a property. I also show some of the reasons why people may not want to buy a property (and whether these are good reasons not to buy property).

Now you might own a home but rent it out – depending on whether you play by the rules will determine whether you have to pay tax (and how much).

Reasons to buy a home

1. Forced Savings

To buy a home you need a home loan or mortgage (unless you have saved the whole amount).

And when you are paying a mortgage it is forcing you to slowly pay off your house (the difference between the house and the loan on it is called ‘equity’ – that is the portion you own).

Reasons not to buy a home

1. Locked in to a mortgage

How a mortgage works

Sometimes a picture says a thousand words (so later I’ll let you down loan a loan schedule I have)

Say the bank lends you $250,000 for an apartment.

Interest -The bank charges interest (usually monthly) either at fixed rate = Fixed Loan or in line with the rate they can borrow = Variable Rate on the loan. 

Loan Repayment – The  bank will work out a repayment so that you pay back the loan (usually over 25 or 30 years).  If the interest rate doesn’t change - this repayment will stay the same for the period of the loan.

The loan repayment will pay off the interest charged – and the balance repays part of the loan (called principal). So this is called a ‘principal and interest’ loan (you can also get ‘interest only’ loans).

Mostly interest at the start - At the start of the loan you might only pay $100 a month in principal (given the interest charged every month). However over time as you start to pay the loan off – less interest is charged per month (and you pay more principal).

Posted in Debt, Property

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