How to find the best mortgage for you

Knowing how much you can borrow to buy or invest is one of the most important pieces of the property puzzle.

But be wary of getting too excited about spending up big simply because a lender says you can borrow a certain amount.

Spending less than you've been pre-approved for means lower debt burden, risk mitigation, improved cash flow, and room for future investments.

How do you decide on a fixed mortgage, variable or a combination of both?

Typically, fixed and variable interest rates differ from each other. You need to align your needs with the most suitable offering available to you.

So, how do you boil down your decision to one mortgage choice?

Answer these questions:

• Do you want to offset money? Most fixed-rate lenders will not allow you to set up an offset account, so a variable loan may be the best option for you or a small variable loan portion that you can offset (split loan).
• How are current interest rates trending? If interest rates are trending downward, you could maximise this opportunity and stick with a variable rate. On the flip side, if rates are trending upwards, fixing your rate could lock you in at a lower rate, dodging increased interest rates.
• Do you need certainty in your life? If you're in a phase of life that requires certainty around repayments, a fixed-rate loan will allow you to budget and plan.
• Is the property your permanent place of residence (PPOR) or an investment? If your property that you are thinking about fixing is your PPOR, any increased interest charges are not tax deductible; however, if it is an investment property, then generally the interest costs are tax deductible.

Principal and interest vs interest-only

There are six factors to assess when considering principal and interest or interest-only loans:

1. What's the interest rate difference?

Does the interest-only option offer a higher or lower interest rate than principal and interest, and how does that affect your strategy and financials?

2. What's your next investment play?

If you're planning on purchasing your next property within the timeframe of, say, two to three years, paying down the principal could impact your ability to save for that next purchase. Flipping to interest-only may assist you in building the funds you need for your next purchase.

3. Are you buying your PPOR or an investment?

If the property is your PPOR, then generally, I'd encourage sticking with principal and interest, as you want to pay this down sooner (bad debt). For investments, it can be helpful to stick with interest-only to allow maximum cash flow in your life (such as paying down your PPOR).

4. What's your life stage?

The decision between paying down your property investment mortgage with principal and interest or option for interest-only can vary depending on your age and stage of life. If you're younger with a long working life ahead of you, choosing interest-only may not be of significant concern, since you have sufficient time to gradually pay down the investment. However, if you're older or nearing retirement, prioritising the repayment of the principal can be advantageous. By paying down the principal, you can settle the mortgage sooner, providing a sense of financial security before your income changes upon retirement.

5. What's your cash flow situation?

Do you need a certain level of cash flow in your life for future investing or other reasons? If so, interest-only might be your best option. If not, then perhaps you switch your focus to paying down your mortgage by switching to principal and interest.

6. Are you currently paying down your PPOR as well as investing?

If you have your PPOR and investments, then you will need to assess where the priority lies.

Generally, paying down your PPOR as soon as possible is advisable, so you may choose to set that to principal and interest, while the investment can be set to interest-only, thereby maximising tax benefits.

How often should you make repayments?

Another part of the lending consideration is when you choose to make your repayments. Interest is calculated daily, but your repayments can be made weekly, fortnightly or monthly, depending on your lender.

I recommend paying weekly or fortnightly because you'll pay more off your mortgage each year. Some months, of course, have more days than others, so in the longer months you'll pay more interest.

By paying fortnightly or weekly, you're more in line with the weeks in the year, you get one extra payment in each year, and you'll be paying less interest over the life of the loan.

Seek advice

Connect with your mortgage broker to nut out info even further. Ask questions. Look at your numbers and choose wisely. Think about your long-term plans for your home and investing, and make each financial decision with that design in mind.

There's a lot to consider, and it needs to be aligned with your personal situation and strategy.

This is an excerpt from John Pidgeon's book Sort Your Property Out and Build Your Future (Wiley, $32.95).

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