The Pros and Cons of Buying a Townhouse With a Home Loan

A townhouse can suit your budget and your lifestyle, but the loan behind it needs to suit you too. Lenders look at your income, your deposit and the property itself, so a little planning before you make an offer goes a long way.

This article is for buyers on the Central Coast and across Australia who are weighing up a townhouse and want to understand how the finance side works.

What Are the Pros and Cons of Buying a Townhouse?

The main advantage of a townhouse is usually lower upkeep than a freestanding house. The main trade-off is that shared costs and shared rules can come with the property.

On the plus side, many townhouses have smaller yards and less maintenance, and some sit in well-located pockets close to shops, schools and transport. In some areas, a townhouse may be priced below a standalone house.

On the other side, you may pay regular strata or community levies, and you will usually need to follow the rules of the complex. Those rules can cover things like pets, renovations and exterior changes. Resale can also depend on how the complex is run and maintained. None of these are deal breakers. They are simply costs and conditions to weigh up before you sign.

How Does Title Type Affect Your Home Loan Application?

The type of title on a townhouse can affect how a lender views the property, so it is worth checking early. Townhouses can be held under different title types, such as Torrens, strata or community title, and each one comes with different ownership and cost arrangements.

Your solicitor or conveyancer can explain what the title means for you. From a lending point of view, lenders assess each property against their own policy, and those policies differ between lenders. A broker can check how a particular lender is likely to treat the property before you commit, which saves you from a surprise after the contract is signed.

It also helps to ask for the levy details as soon as you start seriously considering a complex. Regular levies are an ongoing cost, and depending on the lender they may be taken into account when your borrowing capacity is assessed.

Home Loan Pre-Approval Before You Bid

Home loan pre-approval gives you a clear idea of what a lender may be willing to lend before you start making offers. It is not a final approval, because the lender still needs to assess the actual property.

With pre-approval in hand, you can shop within a realistic range and move quickly when the right townhouse appears. The trade-off is that pre-approval usually has an expiry period and can change if your income, debts or spending habits change in the meantime. Taking on a new car loan or credit card limit while you are house hunting, for example, can reduce what you can borrow.

If this is your first purchase, our first home buyers page explains how we help with loans and grants.

Interest Only vs Principal and Interest on a Townhouse Loan

Interest only repayments are lower in the short term, but you are not paying off the loan during that period. Principal and interest repayments cost more each month, but they reduce the balance as you go.

Here is an illustrative example using a rate of 6.75% p.a. Consider a buyer with a $600,000 loan over 30 years.

• On principal and interest, the repayment is roughly $3,892 a month.
• On interest only, the repayment is roughly $3,375 a month, which is about $517 lower.

The catch is what happens next. After five interest only years, the balance is still $600,000. The loan then moves to principal and interest over the remaining 25 years, and at the same 6.75% the repayment rises to roughly $4,145 a month. That is about $770 a month more than the interest only repayment and about $253 more than the 30 year principal and interest figure.

In this scenario, the buyer gets breathing room in the early years, perhaps while furnishing the townhouse or building a savings buffer. The cost is a higher repayment later and no reduction in the balance for five years. Most home loans are principal and interest. Your broker can show you which structure suits your situation. You can also test your own numbers with a repayment calculator.

Variable Rate, Fixed Rate or Split Rate?

A variable rate moves with the lender's decisions, a fixed rate stays the same for a set period, and a split rate divides the loan between the two. Each one has a trade-off.

A variable rate can fall if rates drop, but your repayments can also rise. A fixed rate gives you certainty for the fixed term, but it may limit extra repayments and can mean break costs if you leave early. A split loan lets you fix part of the debt for certainty while keeping the rest flexible.

Because a townhouse buyer is often managing levies on top of repayments, many people value knowing what part of their budget is locked in. Which option suits you depends on your budget, your plans and how comfortable you are with change. Rates and discounts vary between lenders and depend on your deposit size, so comparing several is worthwhile. Our home loans page outlines the range of options we can look at with you.

Using an Offset Account to Build Equity Faster

An offset account is a transaction account linked to your loan, and the balance in it reduces the amount of loan interest you are charged. Any savings you keep there work towards lowering your interest while staying available to you.

For a townhouse buyer, this can be handy for covering levies, rates and maintenance while your savings still do some work. The trade-off is that loans with offset accounts can come with higher fees or rates than those without, so it pays to weigh the cost against how much you will realistically keep in the account.

Lenders Mortgage Insurance and Your Deposit

Lenders Mortgage Insurance (LMI) is usually charged when you borrow a high share of the property's value, which is measured by your loan to value ratio (LVR). It protects the lender, not you, and the cost is typically added to what you pay.

A larger deposit can reduce or remove LMI, but waiting to save more means you stay out of the market for longer. Whether paying LMI to buy sooner makes sense depends on your circumstances, and a broker can run both options side by side with you. If you are thinking about buying a new townhouse that is still to be built, our construction loans page covers a different loan structure that may apply.

Check Your Numbers With Someone Who Knows the Coast

A townhouse is a big decision, and you do not have to work through the finance alone. Our team can compare lenders, explain the trade-offs in plain language and help you apply for a home loan with confidence. If you are on the Central Coast, you can also visit our Gosford mortgage broker page.

Call one of our team or book an appointment at a time that works for you.