Can Someone Explain Like I'm 5? The Breakdown of Mortgage Repayment

LLilMicksAu on 14/02/2023 - 17:24
Last edited 15/02/2023 - 07:40 by 1 other user

Hi OzB,

Looking for some advice as Im a little financially illiterate.

Lifetime renter (have a good deal atm). Was looking to buy my first property as an investment.
I need about 600k, LVR is about 68%.

Im a junior doctor in NSW. About 135k/year with overtime.

I was offered ~8% Principal and interest from CBA including wealth package and offset account, but they were happy to 'discount' me to 6%.
On their website and calculator principal and interest for investment home LVR of ~68% is about 5.2%.

Im just confused as to where this 8% came from. Is it some arbitrary number they just made up to make me feel like I got a bargain, or is there something that's added? i.e. is the interest rate 5.2% and the principal is say 2.8% together? And if this is so, and its discounted to 6% how much of interest and principal is discounted? i.e. will I be paying 5.2% interest and 0.8% principal?

Am I completely off the mark?

Someone please explain T_T'

Financial Home Loan

Comments

  • randomusername2017 on 14/02/2023 - 17:31
    +2

    mortage

    financially illiterate

    You Sure?..

    3 different independent interest rates …8/6/5.2

    Year 1 approx 75% of your payment is interest 25% principal.
    Different variations depending on offset/structure.

  • Drakesy on 14/02/2023 - 17:34
    +6

    My best recommendation is to go to a mortgage broker. It doesn't cost extra and they're obliged to run you through these questions and all the products on the market.

    The CBA 8% sounds like it's just an arbitrary rate to get you to think it's a good deal.
    Generally, around 5% for an investment property would be the go-to.
    Also you'll be forgoing any stamp duty exemption or First homeowners grant by going down this route which will be an additional cost.

    • Shoocat on 14/02/2023 - 17:39

      Mortgage brokers always cost you money, since by definition the bank is paying them a commission on your loan.

      However, in your case it's worth it since unless you understand what's out there, different types of loans etc. you're unlikely to get the best deal on your own.

      For example, are you aware of offset loans, how to use repayment cycles to best effect and the role fees and charges play? If this all seems like double-Dutch you should see a broker.

      • LilMicksAu on 14/02/2023 - 17:48

        Ah yes okay I'll have to see them, as you lost me at a repayment cycle. Is it just timing when you pay like a credit card repayment?

        • randomusername2017 on 14/02/2023 - 17:52

          Monthly/weekly/fortnightly payments

          Try googling mortgage calculator… punch in some numbers and adjust variables… might make it clearer.

        • Shoocat on 14/02/2023 - 18:42
          +1

          This explains it neatly.

          Essentially, more frequent payments can save you a lot because you end up making extra payments without really noticing.

      • kipps on 14/02/2023 - 21:50

        Mortgage brokers always cost you money, since by definition the bank is paying them a commission on your loan.

        Not always true. Brokers can get you unadvertised deals and better discount rates. They've been well worth it for me - and saving me more than the commission they've been paid.

  • LilMicksAu on 14/02/2023 - 17:37

    Haha sorry Illiterate may not be the right term.

    Home loan illiterate? I just don't get it and the more im reading the more im confusing myself.

  • hmac on 14/02/2023 - 17:39

    The price on their website is after the wealth package discount and other criterias that are met

  • Farrba on 14/02/2023 - 17:40
    +3

    what i dont get is why make banks richer?

    why not temporarily increase taxes instead?

    • Mechz on 14/02/2023 - 17:54
      +5

      Every home loan that isn't PPOR should have a 2% interest tax on it.

      • LilMicksAu on 14/02/2023 - 17:56
        +1

        Whats PPOR?

        • Mechz on 14/02/2023 - 17:56
          +1

          Primary place of residence.

    • brendanm on 14/02/2023 - 23:11

      why not temporarily increase taxes instead?

      Has a tax ever been temporary?

  • Top G on 14/02/2023 - 17:41
    +1

    Doctor you say..

    • LilMicksAu on 14/02/2023 - 17:47
      +1

      Questionable most of the time :')

    • EightImmortals on 14/02/2023 - 18:21

      Yes, doctors ARE baffled! :)

  • SF3 on 14/02/2023 - 17:51
    +2

    Im a junior doctor in NSW

    Where do you even find time to think and post this!

    • LilMicksAu on 14/02/2023 - 17:52

      Off days when I'm not rostered in the ED and having a small mental health crisis about not being able to afford a house in sydney :')

  • tsunamisurfer on 14/02/2023 - 18:03
    +1

    Best thing to do is approach a bank lending specialist who will give you some introductory information what you can expect from the bank and what is expected from you.

    As for Principal Vs Interest component breakdown, I would suggest most of the time the average punter does not need to know this. Just pay as much (above the required minimum) as you can into the loan or into the offset account (if applicable).

    It looks like you have a decent income and deposit (from your LVR), so that's 2 large hurdles covered.

    You will hear about a lot of people struggling right now due to interest rates, ALWAYS account for interest rates going up and pay as if its 7-8% to be safe.

  • LilMicksAu on 14/02/2023 - 18:41

    Okay so basically Ive since called around and apparently the 8% was an assessment rate? What are the implications of this?

    • BOGOF on 14/02/2023 - 18:48
      +4

      So, you've called around and found out it's an assessment rate, but didn't ask what the implications are, but rather ask on a bargain site?

      Nurse, what's this red stuff, and what shall I do?

  • Summoner on 14/02/2023 - 18:50

    The interest rate that they throw at you at the initial meeting is usually the Standard Variable Rate without Wealth Package which is currently 8.13% p.a on their website.

    Then they give you the Standard Variable Rate with Wealth Package LVR 60.01% to 70%
    (with discount margin offer) which is currently at 5.10% p.a.

    Since you mentioned that they are offering about 6% interest, it seems they may have a different LVR.

    Did you confirm your LVR with the lender?

  • SBOB on 14/02/2023 - 19:28
    +2

    Considering GPs often they'll just google to find details on the symptoms you mention, couldn't you apply the same google skills to understand mortgage rates, repayments etc :)

  • AndyC1 on 14/02/2023 - 19:37
    -4

    What did CBA say when you asked them?

    • Keplaffintech on 14/02/2023 - 20:06
      +1

      What did OP say when they made the post? Try reading it before dropping a totally unoriginal and unhelpful comment.

  • CalmLemons on 14/02/2023 - 20:27
    +1

    Looking for some advice as Im a little financially illiterate.

    Lifetime renter (have a good deal atm). Was looking to buy my first property as an investment.
    I need about 600k, LVR is about 68%.

    Im a junior doctor in NSW. About 135k/year with overtime.

    I was offered ~8% Principal and interest from CBA including wealth package and offset account, but they were happy to 'discount' me to 6%.
    ***It's always like this, you get a 'margin' discount over the base rate.
    On their website and calculator principal and interest for investment home LVR of ~68% is about 5.2%.
    ***This is dependent on the total value of your loan, risk assessment etc.

    Im just confused as to where this 8% came from. Is it some arbitrary number they just made up to make me feel like I got a bargain, or is there something that's added? i.e. is the interest rate 5.2% and the principal is say 2.8% together? And if this is so, and its discounted to 6% how much of interest and principal is discounted? i.e. will I be paying 5.2% interest and 0.8% principal?
    ***Principal is not discounted. That rate is purely the interest you pay. The principal will be calculated at your repayment of your loan over 30/25 years.

    Am I completely off the mark?

    ****As a doctor there is normally a special lender for each bank that deals with health professionals, e.g. NAB Health for example.
    Normally you get to have a higher LVR without a requirement for insurance.

  • freefall101 on 14/02/2023 - 20:58

    IMO I'd take advantage of all the first home buyer grants and sublease out where you currently live if it's so good (although I'm guessing it's code for renting from a family member or living at home, in which case good for you, I wish I did that rather than blowing my money on an empty house where I drank too much in my early 20s)

    The interest rate you pay depends on exactly what you're buying, the calculators are only indicative. You need to look at the details of each specific loan type - https://www.commbank.com.au/home-loans/interest-rates.html#t…

    Let's put it in medical terms. You saying "I want to buy an investment property" is a lot like someone coming in saying "I have a headache". The 5.2% in the calculator is basically "Panadol" - it's the generic response and roughly a good treatment. However when you talk to them more, you find out more about them, you can diagnose exactly what they need - these are the loan types with varying interest rates. Once they narrow down a specific product that's good for you, they'll give that treatment.

    However the banking system is more like American healthcare. You walk into a hospital and they see you as a walking dollar sign. They're going to try sell you on stuff you don't need, your migraine now requires a full brain transplant that costs way more than what you need. What helps is someone to navigate it for you, which doesn't exist in the US healthcare system but fortunately we have mortgage brokers. I'd ask doctors who have worked there 10 years longer than you or anyone in the hospital finance team if they know any. You know, the people who actually make money working as doctors.

    One other thing, "comparison rates" are basically like new age medicine. There's probably something in there somewhere that makes sense, but mostly it's nonsense. Pay attention to the fees you pay and the interest rates you're locked into and hope like hell rates don't go up to 15% in the next few years.

    • Debt Free on 14/02/2023 - 23:58

      I thought the ‘Comparison Rate’ was designed so that the real COST (as opposed to all features) of a loan- after all set up fees and charges- could be compared with other lenders.

  • soan papdi on 14/02/2023 - 22:08

    I was offered ~8% Principal and interest from CBA including wealth package and offset account, but they were happy to 'discount' me to 6%.

    In simple terms, the bank will offer a discount (8% - 6% = 2% for you) on the advertised rate to each customer. So everyone is on 8% less their specific discount. If a friend of yours signs up at the same time, there's no surety they will get the same discount. it could be more or less.

    Over the next few months, when interest rates go up, 8% will become 8.25% (for example) and your discount will stay the same (2%) and hence your mortgage interest will also go up (8.25% - 2% = 6.25%). If you call them to negotiate a better rate and they agree, they will increase your discount and this discount will remain even if the advertised rate goes up or down. Like CalmLemons said, this only applies to how much interest you will pay and doesn't affect the principal at all.

  • Debt Free on 15/02/2023 - 00:54

    It’s the Bank’s job to explain their products to you fully and clearly so that you completely understand. This is all they do, so they should do their job properly, unless they are trying to up sell you a loan you don’t need.
    Just choose a loan with an Offset Account so that you can put extra payments in- if and when you ever want to. Then choose between Variable Rate, OR Fixed/Variable Combination (eg. 80% Fixed for 3 years portion and 20%Variable portion). Make sure you can easily afford repayments even if interest rates go up to 12% one day over the next 10 years, OR be ready to sell fast if you ever can’t keep paying the minimum required. That’s all you need really. Be careful of line of credit type loans, and anything you have to pay an annual fee for- you don’t need it.
    Don’t worry, don’t hurry, and buy something you love.

  • ForkSnorter on 15/02/2023 - 07:45

    Why would you buy an investment property as your first property? If you sell it in future and make a profit, you’ll have to pay 50% of the capital gains in tax. You’ll also miss out on stamp duty concession if applicable.

    • ForkSnorter on 15/02/2023 - 10:44

      Sorry, meant 50% tax on the capital gains.

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