Home buyers who start their property investing by purchasing modest properties with smaller home loans can be financially better off than those who buy more expensive properties with associated larger mortgages.
Starting small can be a smart financial move, with the added benefit of considerably less risk and stress.
There’s a lot to be said for buying something reasonably basic initially, to get that first foot on the property ladder. The goal should be to start off with a smaller loan size and work hard to put as much of a dent in your home loan balance as quickly as possible.
This is because in the early stages of a loan, the majority of your repayments are being consumed by interest whereas extra repayments go straight off the principal.
If you have a large loan where you can afford to pay only the minimum repayment, it will take a lot longer to make inroads than if you had taken out a smaller loan and paid extra. The following example in the table below illustrates our point:
Taking a ‘stepping stone’ approach whereby you build up equity in a modest property and then use that to upsize to a more expensive home with the benefit of having a significant deposit is a sound strategy. It means that at some stage you will have the ‘dream house’ but you minimise the associated interest bill that could total hundreds of thousands of dollars.
If you would like specific advice about the pros and cons of starting off modestly, versus buying a more expensive property, please do not hesitate to give us a call.