How to best use a mortgage calculator

How to best use a mortgage calculator

If you’ve started to look into getting a home loan, or refinancing your current loan, then you would have undoubtedly come across a mortgage calculator in your search. These nifty tools can be invaluable in helping you to visualise how a mortgage would fit into your current budget and whether or not you can afford the repayments comfortably.

The calculators work by estimating your monthly repayment amount based on how much you want to borrow, the interest rate of the loan you’re looking at and the length of the loan among other factors. Using a calculator is one of the fastest ways to determine if your dream property is within your reach or not.

There are mortgage calculators provided by banks and by financial comparison sites which let you enter various, anonymous details to personalise your calculation. So, now you know what mortgage calculators do, here are a couple of tips on how you should (and shouldn’t) use them.

Pros
  • Can give you an indication of what you can afford to borrow
  • Allows you to see repayment schedule
  • Assists with budgeting for the future
Cons
  • Can not factor in future variable rate changes
  • Can not factor in useful features
  • Can not factor in added fees and costs

Use it to see if you can service a loan

Serviceability is defined as whether or not a person can make the repayments on the loan comfortably. It takes into account everything a lender will look at to determine if you can afford a loan including your income, partner’s income, the size of your deposit, the size of the loan as well as other factors. A mortgage calculator can give you your first indication of whether or not you will meet a lender’s serviceability requirements.

As a rough guide, your monthly home loan repayments should be less than 30 per cent of your monthly income after tax. Anything above 30 per cent is categorised as ‘mortgage stress’. If you are looking at variable loans, it is important to keep in mind that you must be able to keep paying the loan even if interest rates rise.

Use the mortgage calculator to simulate what your repayments would be if your interest rate went up by up to five per cent. If you would still be able to comfortably afford repayments, you may be in a good position to borrow. That said, it’s up to each lender to work out whether they think you can service the loan, so use the calculator as a guide only and always remember to account for rate rises.


Use it to start your search – not to finish it

Let’s say you’re at the point in your home loan search where you have compared a range of different home loans and chosen your top contenders. At this stage it is probably helpful to use a mortgage calculator to determine how much each loan will set you back in monthly repayments.

Once you get to this stage though, it’s not as easy as simply picking the loan with the lowest repayment. There are many other factors that go into choosing the right mortgage. For example, if the home loan with the lowest monthly repayments doesn’t allow you to make extra repayments over the life of the loan you may find that over time you pay more in interest than if you had chosen a different home loan. Or the lowest rate may be offered by a lender you have never heard of but you want to keep all your financial products with your current bank.

There are more reasons than just a low repayment rate to choose a home loan so while a mortgage calculator is a great place to start your search, don’t let it be the only deciding factor. Make sure you read up on the features offered by different home loans as well as the different types of lenders to get a loan that best suits your needs.

Use it for the interest rate – but don’t forget the added expenses

House and key shaped paper cutout, calculator and magnifier on wooden table.

One more thing to keep in mind when using a mortgage calculator is that it won’t add together all the added fees and costs that are associated with taking out a new loan or buying a house. If you’re purchasing a new home, then consider that on top of the money you are borrowing you will be expected to pay legal fees, stamp duty and numerous other upfront costs.

If you are refinancing, you will still most likely be incurring set up costs for your new loan and a potential break fee charged by your current lender if you settled your loan before June, 2011. There are also sometimes ongoing fees and costs that a mortgage calculator won’t be able to factor in for you such as the cost of keeping an offset account or redrawing on your mortgage. You can check the product disclosure statement of the loans you are considering to see what sort of extra charges you may have to pay over the life of the loan.

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Learn more about home loans

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

Mortgage Calculator, Loan Purpose

This is what you will use the loan for – i.e. investment. 

How do I calculate monthly mortgage repayments?

Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.

Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What are the responsibilities of a mortgage broker?

Mortgage brokers act as the go-between for borrowers looking for a home loan and the lenders offering the loan. They offer personalised advice to help borrowers choose the right home loan for their needs.

In Australia, mortgage brokers are required by law to carry an Australian Credit License (ACL) if they offer credit assistance services. Which is the legal term for guidance regarding the different kinds of credit offered by lenders, including home loan mortgages. They may not need this license if they are working for an aggregator, for instance, as a franchisee. In both these situations, they need to comply with the regulations laid down by the Australian Securities and Investments Commission (ASIC).

These regulations, which are stipulated by Australian legislation, require mortgage brokers to comply with what are called “responsible lending” and “best interest” obligations. Responsible lending obligations mean brokers have to suggest “suitable” home loans. This means loans that you can easily qualify for,  actually meet your needs, and don’t prove unnecessarily challenging for you.

Starting 1 January 2021, mortgage brokers must comply with best interest obligations in addition to responsible lending obligations. These require mortgage brokers to act in the best interest of their customers and also requires them to prioritise their customers’ interests over their own. For instance, a mortgage broker may not recommend a lender who gives them a commission if that lender’s home loan offer does not benefit that particular customer.

How much money can I borrow for a home loan?

Tip: You can use RateCity how much can I borrow calculator to get a quick answer.

How much money you can borrow for a home loan will depend on a number of factors including your employment status, your income (and your partner’s income if you are taking out a joint loan), the size of your deposit, your living expenses and any other debt you might hold, including credit cards. 

A good place to start is to work out how much you can afford to make in monthly repayments, factoring in a buffer of at least 2 – 3 per cent to allow for interest rate rises along the way. You’ll also need to factor in additional costs that come with purchasing a property such as stamp duty, legal fees, building inspections, strata or council fees.

If you are planning on renting the property, you can factor in the expected rental income to help offset the mortgage, but again it’s prudent to add a significant buffer to allow for rental management fees, maintenance costs and short periods of no rental income when tenants move out. It’s also wise to factor in changes in personal circumstances – the typical home loan lasts for around 30 years and a lot can happen between now and then.

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

What is an ongoing fee?

Ongoing fees are any regular payments charged by your lender in addition to the interest they apply including annual fees, monthly account keeping fees and offset fees. The average annual fee is close to $200 however there are almost 2,000 home loan products that don’t charge an annual fee at all. There’s plenty of extra costs when you’re buying a home, such as conveyancing, stamp duty, moving costs, so the more fees you can avoid on your home loan, the better. While $200 might not seem like much in the grand scheme of things, it adds up to $6,000 over the life of a 30 year loan – money which would be much better off either reinvested into your home loan or in your back pocket for the next rainy day.

Example: Anna is tossing up between two different mortgage products. Both have the same variable interest rate, but one has a monthly account keeping fee of $20. By picking the loan with no fees, and investing an extra $20 a month into her loan, Josie will end up shaving 6 months off her 30 year loan and saving over $9,000* in interest repayments.

Mortgage Calculator, Interest Rate

The percentage of the loan amount you will be charged by your lender to borrow. 

Mortgage Calculator, Loan Term

How long you wish to take to pay off your loan.