Do you have a favourite zombie movie or book?
‘I am Legend’ gave me nightmares for months. I was that young adult pulling all the blinds down at dusk. I do know that it is not actually possible to become a real zombie; which is very much a huge relief for me!
But it is possible to become what I call a home loan zombie. Yes, a home loan zombie. And we don’t want that either.
To prevent this, it’s important to arm yourself against two common and big home loan traps. Don’t worry, I’ll get to the two big traps soon. First, let’s dive more into home loan zombies.
So what is a home loan zombie?
A home loan zombie is someone who let’s their lender make decisions for them on their home loan and property purchase. I’m sure you’re saying, “well, I don’t do that” or I would never do that”.
Or would you?
Let’s say you have $100,000 saved up for a house deposit.
Now let’s say your bank is willing to give you $400,000 to purchase a property.
So, you have $100,000 in your own savings, and $400,000 from the bank. That is, you have $500,000 to play with.
With that amount of money, how much would you go and spend on a house or property? What price house would you look at buying?
A home loan zombie would say, “Great! Let’s go find a place for $500,000!”
A home loan zombie would also say “Great! Let’s go find a place for $460,000!”
The second home loan zombie was smart enough to minus some fees and charges (e.g., stamp duty, taxes, legal fees. insurance, and independent valuation); but there is still a cause for concern here.
Um, ok. At this stage you might be realising you could end up being a home loan zombie! Don’t worry, there is a solution. So what is a home loan zombie?
A ‘home loan zombie’ is someone who buys a property based on how much their lender allows them to borrow—hang on, what, isn’t that everyone!
There’s a catch.
Maybe it will help to explain what a home loan zombie is not!
Someone who is not a home loan zombie
Someone who is not a home loan zombie would approach property buying in reverse.
You are not a home loan zombie if you are the person who makes the decisions about your home loan and who makes the decisions about what is best for your situation and what you want to achieve. And they think of home loans in reverse.
Someone who is not a home loan zombie instead asks: how much can I afford to repay on this home loan, how much interest am I willing to pay, how many years is it going to take me to pay off, how many years do I want to pay it off in, how much interest do I want to pay in total. They say instead “$500,000 is nice but it doesn’t fit with my plan. The amount I spend is going to be less.” Hey presto… you are not a home loan zombie!
When we become a home loan zombie, we let the lender decide:
- how much we can borrow;
- how much we spend on a property;
- how much we repay; and
- how much interest we pay
We let them decide it all, and we decide nothing or barely anything.
Don’t worry; if you’re confused by this, let me explain it with the two big traps to watch out for.
The first trap is that we borrow the full amount that a lender is willing to give us and we get ourselves into way more debt than we probably would have liked, particularly for a first home loan.
How long will it take you to pay off? How long do you want it to take?
Here’s a tip. You don’t have to borrow as much as they are willing to give you; and you don’t have to buy the most expensive house that you could possibly afford.
You don’t have to.
The more you borrow:
- the more you spend;
- the higher your repayments;
- the longer it takes to pay off your home loan;
- the more interest you pay over the life of your loan;
- the longer it takes you to buy the house of your dreams or a home in your favourite location.
If you let the lender determine your home loan amount and how much you ultimately spend on a property, you could be paying hundreds of thousands of dollars more in interest than you want to.
How much you spend on a property should never be determined by how much you can borrow. You need to decide how much you want to borrow. We’ll talk about this more in the later posts.
In the meantime, there’s one other trap to becoming a home loan zombie that you need to be aware of.
The second trap is that when we let the lender decide how much we spend, we also let them decide how much we are going to repay. ‘Ok, so now that I am borrowing $400,000, how much will the interest repayments cost?’
The repayments that your lender tells you to pay are always set to the minimum you need to pay to pay it off in about 30 years.
But do you want to pay it off in 30 years?
Do you want it to take 30 years to pay off your home loan?
Unless it’s an investment property, probably not.
The higher your repayments:
- the faster you pay your home loan off;
- the more you save on your home loan;
- the less interest you pay over the life of your loan; and
- the faster you could either be debt free or buying your next property, possibly in your favourite location.
Now, let’s go back to the point about people who are not home loan zombies; they think about home loans in reverse.
How not to become a home loan zombie
There are two things you can do to think of your home loan in reverse.
Firstly, there are two really important question to ask yourself—when and how much? When do you want to pay your home loan off by? Do you want to pay it off in 5 years, in 10 years or longer? How long do you want to pay your home loan off for? And how much can you repay?
When you can answer these two questions you can set your own home loan amount.
Do the calculations. You don’t have to be a math guru to do this, it’s really simple! Don’t go using one of those old fashioned calculators though, use one that lets you plan it in reverse. Use our Reverse Home Loan Calculator.
You will also need to know how much you can afford to repay regularly; and if you don’t, work that out too.
And that is how not to become a home loan zombie!
To learn more about reversing your home loan thinking, read ‘Consider home loans in reverse‘.