I personally do not like to take loans. Even when buying a car, I bought one that I could afford with cash on hand.
At times, taking a loan can have its merits. For example, using a credit card with 0% interest instalment plan.
When securing a loan gets easier and cheaper, we tend to buy things that we don’t need. But more significantly, by taking a loan or even using credit cards, it can affect your Total Debt Servicing Ratio (TDSR). This directly affects the type of property that you can own.
Household without any debts
In the best case scenario, when a person do not have any debt, you will see that an increase of $750 in monthly income allows one to get up to $100,000 loan or $133,333 house price (figures are based on max 75% loan to valuation for 30 years).
A family with a monthly income of $4,500 can actually own an $800,000 investment home if they do not have any outstanding loan.
Household with $1000 monthly debt
However, if one has an outstanding debt, the outlook can be very different. A $1,000 debt requires additional $1,670 monthly income to support the commitment. For example, when buying a brand new car by taking up a car loan.
If I took a $75,000 car loan with a monthly instalment of $1,000, you will see from the table below that I will need a monthly salary of $6,160 instead of $4,500 to be eligible to own a $800,000 investment home.
Household with $1,000 monthly debt and $100,000 additional deposit
To further rub salt to the wound, every additional $100,000 deposit pledged as security will only reduce the monthly income required by $625. Meaning that I will need a $5,535 monthly salary, instead of $4,500 even with an additional $100,000 pledged as security.
This is the reason why I urge everyone to pay up all your debts first before proceeding to buy your next investment property. If you are thinking of whether to buy a car or a property first, I believe the answer is quite obvious.
We have to be very strategic if we are to do asset planning. We might think that it is not important to plan our assets as it is too confusing. However, we are all affected one way or another in every stage of our life. We need to plan for our future, our retirement and our kids’ future.
When taking a loan, please rethink again how can it affect our asset planning. We might be missing out on the bigger picture.
Feel free to contact me if you have any questions!