Buying a home can be stressful and even the best planning can be derailed in the heat of the moment. But you might be surprised how little – or how much – an extra bid will add to your home loan each month.
Buying at auction
You are standing inconspicuously at the auction of your dream home. You hold a bidding paddle in your hand. Your partner stands anxiously next to you. And the bidding starts! You get a couple of bids in, but someone on the other side of the auctioneer holds the winning bid. A bid that is dangerously close to your maximum. You don’t want to lose the auction – it’s your dream home after all. But you don’t want to place your family in a precarious financial position. What should you do if you are buying at auction?
Canberra is the auction capital of Australia. Scenarios like this happen often at auctions and many people get themselves into a situation where they let their hearts (or the distressed look on their partner’s face) guide their bidding decisions.
There is a great risk when buying at auction that you could spend way more than you can afford on the property – or similarly lose out by one bid to someone who may also be at their maximum.
What’s that extra bid worth?
Have you ever considered when buying at auction, how much that extra bid might actually cost you in terms of repayments? You might be surprised how little – or how much – an extra bid will add to your home loan each month.
Let’s say after paying your deposit, your lender has confirmed that you can borrow $500,000. If the rate is say 4% pa, and you are making principal and interest repayments, your monthly loan repayments will be approximately $2,387 each month. An additional bid of $1,000 is going to cost you an extra $4.78 per month, while an additional bid of $5,000 is going to cost you an extra $23.87 per month.
It doesn’t sound like much, but if you have reached the maximum amount the lender has offered you in the pre-approval process, you have overcommitted and may be risking your deposit. On the other hand, if you haven’t reached the maximum you are able to borrow, it may be worth taking that risk in order to secure the property from the other bidders.
This table provides more information about the cost of an extra bid based on the bid amount and the borrow interest rate. It assumes a principal and interest loan over a 30 year loan term.
Decisions like these are important and it’s crucial you get the right advice on:
how much you can afford to borrow,
what the repayments will be and
how this decision will impact any other financial goals you might have.