Chris Childs


How big should your mortgage really be?

Are you worried about the size of your debt? Owe too much to the banks and are worried about making repayments? Don't want to be beholden to your lender for longer than you need to be? Well we've got good news: people are worrying about the wrong factor for their loans. Size doesn't matter as much as you think. What does matter is how you structure it.

Feeling shaky on your mortgage?Feeling shaky on your mortgage?

What does the average loan look like?

What do you think the average debt in Australia is? According to the latest AMP/NATSEM report, it's around about $250,000, the majority of which comes from mortgages.

Some of that will be first-home buyers, other investors, and still more people reducing their debt over a multitude of years. Some will have more, others will have less, but a lot of people are getting worried that their loan sizes might be too big, that their repayments are too large. 

The obvious solution is not to take on debt – but that takes you right out of the property race altogether, and you could be missing out on a great wealth-building opportunity by doing that. What, then, should concerned Australians do?

Size doesn't really matter

The actual size of your loan is secondary to how it is structured.

Here's something that people are forgetting: the actual size of your loan is secondary to how it is structured. With the right features and style of mortgage, you can find life a lot more manageable, even with higher debt.

For example, take a standard principal-and-interest loan of $400,000 at about 5 per cent per year. Over 30 years, that would end up costing you $2,150 per month to pay off fully, paying almost the total amount of the loan over again in interest. Not undoable by any means, but not ideal either.

Instead, take an interest-only loan with a credit facility,into which you put your paycheck each month to reduce the total interest you pay. Rather than the bank slicing off a tiny part of your repayments on paying back the principal and taking the rest for the interest, you are reducing your interest paid by directly paying off the principal. Plus, your actual repayments are lower because of the interest-only nature of the loan.

In other words, you are paying less per month and reducing your loan faster at the same time – all from having a better structured loan. In fact, through this method, we've coached people into being able to buy seven properties in seven years.

Final thoughts

Rather than being beholden to the banks for years, hat in hand asking for capital, you can build your own wealth and use a few simple tricks to reduce your debt and improve your lifestyle along the way. You don't need to worry as much about how much you are borrowing, but rather how you are borrowing it.

You can learn how to get started by getting in touch with one of the property mentors here at Think Money, or come along to one of our seminars. Stop worrying, and start taking control!