Wonder what the bank makes from your home loan?
Shared by JA
Since my budgeting workshop post, I have started researching different ways to invest my money once I reach my goal amount. It seems important to do something with it to make sure that I am moving ahead, especially when inflation eats away at the value of your cash.
I started looking at property but have always had an aversion to the idea of buying a house because I could not see enough of an upside. I finally did some calculations which I wanted to share and also spend some time showing you how to do this for yourself.
I think it is extremely important that if/when you purchase a property that you understand how much the debt is going to cost you. Equally, even if you sign onto a fixed term contract that you also consider what your loan and interest repayments could look like with an increase in interest rate. By doing this exercise, you can anticipate and be prepared for any future events.
Knowing your numbers is important for your budget as well as understanding your limits. This will go so far in managing your emotional wellbeing when dealing with your finances and helping make the best decisions for your future success.
** Again this is not financial advice, it is provided as a workshop in understanding the breakdown of your mortgage repayments.
Let’s look at what history tells us
This graph is the Standard Variable Home Load Interest Rates from 1959–2014 in Australia which I found at http://www.loansense.com.au/historical-rates.html.
It seems like a good place to start so I used the table to create a graph representation:
Obviously in the late 80’s to early 90’s, life was pretty tough for anyone with a mortgage. 17% is an incredible amount of money to be paying in interest!
Being a true representation you can use this to see what can potentially (and has) happened in the market.
But 5.51% is awesome isn’t it?!
I totally agree that 5.51% is incredible in comparison and seems like a great time to jump into the property market. So this leads me to my next investigation of what percentages of interest rate would actually cost you?
In other words, how much money will the bank make out of me to lend me the money to buy a property?
With this information I can weigh up whether the downside of paying the bank is worth the risk.
Firstly, I found a site that has awesome calculators. This particular one gives me the information I want in relation to breaking down the interest vs principal payments of a loan at a set percentage rate; http://www.calculatorsoup.com/calculators/financial/amortization-schedule-calculator.php.
Personally, I would consider buying a 2 bedroom unit close to the beach on the Gold Coast where I live with a median unit value of $449, 500*. To keep it simple, let’s say I only need to borrow $400,000 and my loan term is 30 years. Here is what the first 5 years of my mortgage repayments would look like at 5.51%
1. 5.51% = Monthly Repayment of $2273.67/month
So in 5 years I will have paid the bank over a quarter of the loan value in interest!
The reason most people don’t even notice the amount they are paying is because it is included in the minimum repayment calculation. It’s not added to the loan, it’s like a monthly fee that takes a massive chunk out of each repayment.
In my mind it really is a lot of money to pay for the opportunity to buy a property and then asks the question: What would changes in interest rate have on my repayments?
So let’s look at a few different scenarios would look like:
2. 6% Interest Rate = $2398.20/month
3. 7.5% Interest Rate = $2796.86/month
In the end everyone will make their own choice about property and how much it will factor in their financial choices. For me I would like to see if there is another option that could yield a better upside for my investment as this just seems like an extremely expensive option.
I have put the workshop below including links to the calculator for you to try this out with your own situation. Have a play around and see what it looks like now and what it could look like as things change in the future.
What does your graph look like?
This part is a workshop for anyone who would like to look at their own graph but needs some help with creating it. I have broken down each step below for you.
There are a few different things you can look at here, you may be happy playing around with what different interest rates look like on the website alone.
On the other hand if you jump in and try the workshop and it’s a bit too long, you can short cut by getting yourself to the point where you paste the table into your spread sheet. From there highlight the interest, principal or payments column to check the totals as shown below.
Workshop — Interest Vs Principal Graph
Open the calculator in the link below and complete the fields as applicable to your loan:
Notes: Number of payments is based on the length of your loan in months. Multiply the length of your loan by 12 to get your number if payments.
Click Create Schedule
This will show you the full schedule for the lifetime of your loan
At the top, you will see the total payments and total Interest payments for the loan. Underneath is a table detailing a periodical breakdown of the principal and interest parts of each instalment.
To take it one step further, you can do some basic calculations in excel to see what this is costing you each year and also create a graph like I have shown above to represent the expense of your loan.
To do this, simply highlight the data in the table (Highlight as far as you want to see in total. 12 periods = 1 year)
Hold down CTRL + C to copy the contents of the table
Open Excel and Hold down CTRL + V to paste the table
Remove all the additional header lines (highlighted yellow above) to make one continuous list
Add 2 new column headers as shown
Type the following formula into cell F3 (Principal) + ENTER
Type the following formula into cell F4 (Put the $ sign in front of F3 after you select it in the formula) + ENTER
Copy the formula from F4 down your column
Here are the same steps for the Interest Column
Highlight the values in the 2 new columns including the header rows
From the Insert Menu select Column & Stacked Column Graph as shown below and click ok
To add data labels simply click twice on the last column which will highlight it individually
Right click and select ‘Add Data Label’
Do the same to the blue principal line
Right click on each label that you have created and change to currency in the format tool
And finally… there is your own graph! Well done!
I hope you enjoyed the workshop! If you found it helpful please share.
* Check out this website; http://www.realestate.com.au/neighbourhoods/broadbeach-4218-qld to look at median property prices in Australia (or Google ‘median house/unit prices your country’)
Originally published at thereallifechallenge.wordpress.com on March 8, 2015.