DHOAS Mortgage Payments: The Reality No One Explains

Video Transcript

Borrowing Capacity Versus Servicing Your Mortgage

The Four Cs of Lending

Robbie: While we’re discussing borrowing, there is a framework known as the Four Cs of lending.

The first is capital or collateral, which covers your deposit and purchasing costs.

The second is credit, including your credit rating and history. That history may be good, bad or somewhere in between.

The third is conditions, which can include your age, employment, spending habits and the proposed conditions of the loan.

The final C is capacity.

This is the part I want everyone to listen to carefully.

A mortgage broker, whether that is Deb, the broker we introduce to our clients or somebody you already use, can provide a borrowing-capacity report or pre-approval.

That tells you how much the bank may be prepared to lend based on its assessment.

The lender places your income, expenses, liabilities and other financial details into its calculator.

You either meet the lending criteria or you don’t.

That estimated borrowing power, combined with your available deposit and purchasing costs, determines your potential property price point.

Your price point then influences the location, property type and size you can consider.

It is a formula we naturally work through during our coaching sessions.

However, there is another important part of capacity.

You need to be able to borrow the money and then service the debt.

What Does Your Borrowing Capacity Really Mean?

Robbie: Once you receive a borrowing-capacity figure, what does it actually mean for your household?

How much money will you need to contribute every week or month?

Let’s focus primarily on purchasing your own home.

A serving member may currently live in a service residence, receive Rent Allowance or use single living accommodation.

They may then decide to purchase an owner-occupied home and use DHOAS.

Under the right circumstances, DHOAS can be valuable.

I helped you use it when you were my client many years ago.

However, what does that decision mean for the weekly or monthly family budget?

What is the average current cost of a service residence?

Ryan: Approximately $350 to $370 per week.

Robbie: Let’s call it between $350 and $400 per week.

Now consider somebody borrowing approximately $700,000 to purchase their own home.

An owner-occupier loan generally requires principal and interest repayments.

With DHOAS, the subsidy is usually paid as an additional amount against the eligible loan rather than replacing the borrower’s normal repayment obligation.

The household may suddenly be paying close to $1,000 per week towards the mortgage.

Let that sink in for a moment.

That pause was for effect.

A family could move from paying approximately $350 per week to almost $1,000.

They may be focused on receiving the monthly DHOAS subsidy and view it as the golden ticket they have been waiting for.

However, they could also be spending another $600 or $700 each week to access it.

Ryan: That is a substantial difference.

Robbie: It could mean paying approximately $35,000 more each year towards housing.

Yes, the family is paying off its own home.

However, if they expect to post away soon and convert the property into an investment, the overall financial strategy may not stack up.

I would genuinely be interested to hear from someone who is comfortable paying an additional $700 or $750 each week simply to place a roof over their head.

Mortgage Bill Shock

Ryan: It can be a major realisation.

Robbie: We call it bill shock.

Ryan: When clients begin planning with us, they are often deciding between purchasing their own home and buying an investment property.

They may have watched the videos, become excited and decided:

“Rent money is dead money. I’m sick of DHA, and I want my own home.”

That is understandable.

However, what does the decision actually mean financially?

Without fail, when we place a $700,000 or $800,000 owner-occupier loan into the plan and compare the repayments with subsidised Defence housing, people are shocked.

Once the weekly or monthly difference is clearly displayed, their jaws hit the floor.

Robbie: They ask, “Why would I want to do that?”

Ryan: Exactly.

The Value of Defence Housing Benefits

Robbie: Many Defence members understandably focus on how much HPAS or DHOAS they may receive.

They want to know when they can access the entitlements available to them.

However, one of the most valuable benefits is the cost of subsidised housing itself.

Compare the amount you pay for a service residence with the market rent you would otherwise need to pay.

That difference can be worth far more than people initially realise.

We have several successful property investors who own three, four or five properties.

They all have one major thing in common.

They have never lived in a home they owned.

They used their Defence housing benefits while building an investment portfolio.

Their strategy was to build the portfolio first and purchase their own home later.

Ryan: That approach can allow somebody whose goal is to accumulate multiple properties to continue leveraging and building their portfolio.

When they reach the right stage, they can restructure and purchase their own home.

They may then use DHOAS and other available benefits when those entitlements genuinely fit the wider plan.

Robbie: Exactly.

The important point is to understand both sides of capacity.

A lender may tell you how much you can borrow.

Your property plan must determine how much debt you can comfortably service and whether purchasing your own home is the right move at that particular stage of your life.