If you have read Stephen Covey’s famous book, The Seven Habits of Highly Effective People you will be aware that Habit #2 is “Begin with the end in mind“. This habit can be directly applied to the humble home loan.
In this context, the “end” is the repayment of the loan.
There are two main ways repayment of the loan can occur. Firstly, the property is sold and the loan repaid from the sale of the property or secondly, the loan is paid off over time. I would like to focus on the second reason, as quite often the repayment of the loan from the sale of a property, is promptly replaced with another loan for another property purchase.
If we begin at the end when the loan is finally repaid, we can work backwards and consider actions that are necessary to reach that end. These actions include;
- Deciding how many years you want to spend paying off your loan?
- Maximising the use of your income to accelerate loan repayment
- Determining the maximum home loan amount you can realistically pay off in the allotted time?
- Making decisions in terms of the type, size and location of property?
- Depositing any one-off large payments over the loan term ie an inheritance?
- Controlling your living expenses over the term of the loan?
- Insuring your financial position in case of unexpected events that may have a major impact on your cashflow ie death, terminal illness, permanent income loss etc?
If you think about buying a home and taking on the related loan in these terms it may help you to think strategically before taking the plunge. Planning today’s actions from the end point and working backwards can provide more certainty that your goal will be accomplished than the other way around.
All to often the process is forward driven. You determine your maximum borrowing capacity, get the minimum deposit together, buy a property and then deal with loan repayments afterwards. Very little planning is considered with regards to reaching the end point of the loan.
Next time you are considering a home or investment property loan, try to Begin with the end in mind. It may change the way you approach your next home loan.
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