Finance

The Financial Benefits Of Taking Out A Home Loan

There are many reasons why taking out a home loan is financially beneficial. This article discusses some of the benefits of having a home loan at your disposal. If you have been thinking about purchasing or building a new house but you don’t think that you can afford it without a home loan, then this article discusses the financial benefits of taking out a home loan.

Income Interest Rates

When you take out a home loan, you need to make repayments on both the outstanding capital and also the interest accrued each month. The higher your income, the more money you’ll have to pay off both capital and interest each month. Therefore, if your ability to service your debt improves due to an increase in your salary or other circumstances that result in increased household income, then this ends up improving your cash flow position every month and means that there’s even less chance of defaulting on any repayments than before. When your monthly repayments are scheduled, this reduces any risk associated with unforeseen circumstances that may change your cash flow situation so that it’s more predictable and hence less risky.

You May Avoid Paying A Private Health Insurance Surcharge

Private health insurance surcharges are calculated (for the 2017/2018 year) as 1% of your yearly income for each year that you do not hold appropriate private hospital cover. This means that if you’re over 30, then you’ll end up paying an extra 3% on top of your regular health insurance premiums. If you already have a home loan and are struggling to afford this surcharge; then having another source of income can be helpful in avoiding this surcharge.

The Amount Of Money That Can Be Borrowed Is Flexible

There’s no set amount for how much someone who takes out a home loan can borrow. The folks at Westpac explained that the amount you can borrow with a home loan depends on a range of things because when your lender considers your ability to pay back your loan, they look at many personal and financial details, which may include your income, expenses, liabilities, including other debts and existing assets, such as investment properties.

There are also options available where borrowers with little equity in their home (or none at all) may be able to obtain funds through borrowing against any insurance policies they may own or by selling off select assets provided these do not go below a certain value.

You May Pay Less Tax Than Previously

It is possible to reduce taxable income by taking out a home loan and paying off the interest accrued each month. This can be done by ensuring that you retain some of your income in the financial year to pay off your monthly interest repayments. For example, if on average your extra disposable income after taking out a home loan is $10,000 per annum and you earn an annual salary of $100,000, then this means that you will pay less tax than before because:

  • A deduction for mortgage repayments on the rental value of the dwelling
  • A deduction for any conveyancing fees paid (if applicable)

Your Credit Rating Is Improved

When you take out a home loan, your lender will conduct a credit check on you to determine whether or not they should lend any money to you in order to purchase or build your new home. A good credit history means that lenders are more likely to be willing to extend their trust to you by giving you access to funds via a home loan which can help improve your ability to borrow additional funds such as an unsecured personal loan or even something like a credit card at a bank.

If you already own a house or some other form of property, then this can be used as security to take out more home loans. This means that if anything were to happen and for whatever reason, you default on your repayments, then the lender who holds the second mortgage isn’t left without any collateral in the case of foreclosure or repossession.

The Housing Market Is Expected To Remain Relatively Stable

Australia’s housing market is still popular even after years of consecutive growth. It has been predicted by several independent organizations that Australia will experience an increase in population growth over the next few years which is likely to result in further demand for homes. This prediction combined with continued low interest rates means that it’s unlikely that the value of Australian homes will drop in the short term.

You May Be Able To Borrow Additional Funds In The Future

By taking out a home loan, you’re seen as being more trustworthy overall by lenders because they trust that an investment property will not default on previous repayments. This can increase your chances of borrowing additional funds such as for an unsecured personal loan or perhaps even something like a credit card at a bank or other financial institution.

The value of your dwelling is protected from inflation so long as it’s strong enough to hold its own against potential competitors in the marketplace. Having equity also gives you options if for whatever reason you need to raise some quick cash and selling part or all of your house would help with this goal. By building equity over time, also means that if for whatever reason you do need to borrow some additional funds such as for a car or boat loan, then your house could be used as collateral.

This is because the bank will only lend money up to a certain percentage of its value and so if you have built equity in your home, then this means that you can take out a home loan on top of your existing one which you may not have been able to do before. The decline in property values has given people confidence about taking out high-risk loans such as these.

You Get A New Property

Having a home loan means that if anything happens to your existing house, you can sell it and use the funds from the sale of this property towards purchasing a new home without having to save up enough money for a deposit on your new property. This gives you access to more properties which helps improve the quality of your selection when searching for somewhere to live. Also, it means that you can sell your old property quickly and easily which means that if you need to, then you can just take out a home loan on top of the one you already have.

A home loan gives you an option for an alternative finance source and potentially provides many other financial benefits (including tax benefits). If you can afford monthly repayments and hold suitable security (like a residential property), then applying for a home loan can be a great way to finance house ownership. 

Read Also: The Pros and Cons of Building a New House

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