This is a tough question, especially when it’s being asked in relation to a mortgage. The average interest rate on a five-year loan on a home worth £125,000 is 0.85%. If you were to try to live off this interest alone, you’d need as much as £2,000 to cover your living costs.
But if you try and live off this interest alone on a loan that costs £1,000,000, on average you’d only need as little as £700 to cover your living costs.
While interest rate is one factor to consider in deciding how much to save on a home loan, an important piece of the equation is the level of downpayment.
The amount of money you’re able to take out at the start of your loan will determine the downsize for a home loan. How much is it?
A low downpayment will usually mean the home doesn’t need to go into a buyer’s acceptance loan, which can be a huge saving. However, a low downpayment will mean you have to pay more interest overall.
How much do you need to borrow to live off interest?
This will depend on your needs. If you’re paying for food, for example, and your cost of living is high, but cooking a reasonable amount of food every week means you can live well and have a secure lifestyle, then a low downpayment is appropriate.
But a home that costs a lot or if you need to have some extra money saved up can make it difficult to justify the extra borrowing cost. For instance, if your cost of living is higher than your rent payment, and you don’t want to live in a rental you have to rent out on a monthly or yearly basis, you need to have a high downpayment.
We cover the topic of mortgage interest in more detail here.
You’re paying off a loan, so you should ask yourself how your loan payments are going to be affected after 5 years. The answer will vary by loan, but it generally consists of taking out bigger loans over an extended period of time.
If you buy a property, such as a house, you may want to consider buying a mortgage over a 5 year period. It may help you save more on interest payments and you will avoid needing to buy bigger houses.
However, sometimes it’s best to buy a deposit on a house, which is how you’ll get a downpayment, before you buy a house
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