Home loan repayment calculator
Expert tips for calculating your home loan repayments
Our General Manager of Money, Stephen Zeller knows that having a more accurate understanding of what you can afford is crucial when looking for a home loan. He’s got some tips for any prospective homebuyers looking to estimate what their home loan repayments might look like:
Stephen Zeller
General Manager – Money
Keep a buffer in mind
If you’re worried about a potential interest rate rise when shopping around for a home loan, factor in a ‘buffer’ on top of the standard interest rate. This will give you an idea of what your repayments might increase to if your rate were to go up, and therefore give you a better idea of whether a given home loan would be affordable or not in the event that rates go up.
Increase your repayment frequency
Where possible, look to make weekly or fortnightly repayments towards your home loan. Making regular repayments will reduce the amount of interest you pay over the long term and will subsequently help you pay off your home loan sooner.
Additional repayments will help you save
If your budget and loan product allow you to consider making additional repayments to your loan in excess of the minimum required repayment. You’ll be amazed at the interest you could save over the life of the loan!
Home loan repayment calculator
What is a mortgage repayment calculator?
A mortgage repayment calculator is an online tool that gives you a quick estimate of what your home loan repayments could be and how much the loan may cost over time. It’s a convenient way to understand and analyse your loan obligations. All you have to do is plug in your desired loan amount, interest rate, loan term, estimated fees and your preferred repayment frequency, and our mortgage repayment calculator will show you an estimate of:
- The size of your weekly, fortnightly or monthly principal and interest repayments. For variable home loans, this will be a minimum repayment amount, meaning you can choose to make a larger repayment if you wish. This may or may not be an option if you have a fixed rate home loan, as some will have restrictions or limits on extra repayments during the fixed term.
- The total interest and fees you’ll pay over the life of the loan. While you won’t be able to account for interest rate fluctuations, which you’ll likely experience if you have a variable rate home loan, you may still find it helpful to have a rough idea of how much you’ll pay in interest and fees overall. Home loan fees you’ll commonly encounter include establishment fees, package fees, valuation fees, and settlement fees; however, your actual fees will depend on the lender and the loan you take out.
- The sum total of the repayments you’ll make over the life of your home loan. This figure will likely be significantly larger than your nominated loan size due to interest and fees. You may even find you’d pay more in interest than in principal repayments over your loan term, depending on the loan’s size and interest rate.
While these figures will be estimations and not a perfect representation of what your home loan repayments will look like, they could give you a good idea of the space you’ll need in your budget to sustain a home loan. Also, keep in mind that the size of the repayments on a variable interest home loan will fluctuate over its life (based on interest rate changes), making it near-impossible to know with certainty how much it could cost you overall.
Why should you use a mortgage repayment calculator?
A mortgage repayment calculator can help you map out your monthly cash flow requirements and figure out an appropriate home loan size and property value that suits your financial situation and priorities. It can help you:
- Understand what you can realistically afford and whether a home loan fits within your budget before you apply.
- See how your loan size affects your repayments and total interest paid over the life of the loan.
- Test different borrowing scenarios by adjusting variables such as interest rates, loan terms and repayment frequency to see how they may change your repayments over time. You may realise that you may need a smaller home loan, or that you can actually afford a larger home loan than you previously thought.
Remember, your interest rate will influence the overall size of your ongoing mortgage repayments, making it an important variable when calculating your home loan repayments. When comparing home loans, it’s worth looking at the comparison rate as well as the advertised rate, as it can give you a better idea of the loan’s overall true cost, not just which has the lowest advertised interest rate.
Whether you’re a first home buyer, refinancing or looking for an investment property, knowledge is power. Our home loan calculators and tools, such as the borrowing power calculator, loan comparison calculator, and loan-to-value ratio (LVR) calculators, can give you a better understanding of how home loans work, and let you work out your borrowing power, property purchase costs, including stamp duty, and lenders mortgage insurance.
If you’d prefer to talk it through, you can always speak to one of our expert mortgage brokers, who can guide you through the process at no extra cost to you.
How to avoid common pitfalls when using a mortgage repayment calculator?
Budget for higher interest rates, include the true cost of the loan (including fees, not just the headline interest rate), and take into account upfront and ongoing costs such as stamp duty, lenders mortgage insurance and property taxes, as these can impact your loan amount and repayments.
When using a mortgage calculator, several variables can alter your estimated monthly payments. If you know what you’re looking for in a home loan and have a good idea of your budget, calculating your home loan repayments can be as simple as plugging in the right numbers. That being said, there are a few tips, tricks and pitfalls to be aware of when using our home loan repayment calculator that may help you walk away with a stronger and more realistic idea of what your borrowing power looks like.
1. Factor in a higher interest rate
When assessing your borrowing power, lenders often use a home loan interest rate up to 3% higher than the actual rate as a mandatory stress test. This is to gauge if you can still afford your home loan repayments if interest rates were to change dramatically. So, when calculating your home loan repayments, you may want to check your desired home loan size against:
- an interest rate on par with the current market average
- an interest rate that’s about 3% than the current market average.
This will give you a clear idea if you can ‘truly’ afford a home loan of that size and continue to service it in the event of significant interest rate changes.
2. Choose a longer loan term
Depending on your financial needs and priorities, you may have opted for a smaller loan term, say 15 or 20 years. However, you may also want to experiment with longer loan terms of up to 30 years, as this will typically leave you with smaller repayments stretched over a longer period of time. While you won’t necessarily service the home loan for the full 30 years, opting for a longer term can make budgeting and managing your cash flow easier. If you’d like to know how a longer loan term might lower your monthly repayments and potentially make them more manageable, talk to one of our friendly home loan specialists.
3. Experiment with your repayment frequency
You may also want to explore the merits and sizes of different repayment frequencies to find out whether more or less frequent repayments will better suit your budget and cash flow preferences, and if you can save some money in the long run.
4. Don’t forget extra costs
Mortgage calculators generally don’t include all costs associated with buying a property. It may be worth using our other property buying tools, such as the property buying costs calculator, LVR calculator and stamp duty calculator to factor in upfront property buying costs such as potential lenders mortgage insurance (LMI, which is common for deposits under 20%), stamp duty, and ongoing costs such as council rates and maintenance. These costs can impact your initial deposit and your ability to meet ongoing repayments comfortably.
How to reduce your home loan repayments
Lowering your mortgage repayments involves changing how and when you pay your loan, reducing your interest costs and principal balance, or spreading your payments over a longer period. If your end goal is the smallest regular repayments possible, there are several variables you can tweak and strategies you can adopt that could see your regular repayments shrink somewhat, either from the get-go or over the long term.
Change your repayment frequency
Making more frequent repayments can help you pay off your loan faster and reduce the amount of interest you pay. If you switch to paying half your monthly repayment each fortnight, you’ll rack up 26 half-payments a year, which is the equivalent of 13 monthly repayments instead of the regular 12 months in a year. So you’ve effectively made one bonus instalment for the year. However, this option only works if your lender calculates an accelerated fortnightly or weekly repayment, where you pay exactly half your standard monthly instalment every two weeks (or exactly a quarter if repaying weekly. If your lender uses a standard method, that is just adjusting the fortnightly or weekly amount so the total annual repayment stays the same as before, you won’t make an extra repayment each year, and the interest savings are also insignificant.
Always check with your lender before changing your repayment frequency and confirm how your repayments will be calculated.
Use an offset account
A mortgage offset account is a type of transaction account that is linked to your home loan. The balance of this bank account is then offset against your home loan balance, meaning interest is charged on a smaller overall figure. This reduces your interest repayments, and subsequently, the overall size of your home loan repayments. For example, if you had $400,000 outstanding on your home loan and $50,000 in your offset account, you would only be charged interest on $350,000 of that loan amount. Before you decide whether you need an offset account, check your lender’s fees and rules to make sure the benefits outweigh the costs.
Make extra repayments
Making extra repayments on top of your minimum repayment amount can help reduce your loan balance faster and lower the total interest you pay overtime. In the early years of a home loan, a larger portion of your repayments goes towards interest. Making extra repayments during this period can significantly reduce the overall cost of your loan.
Extend your loan term
You can extend your loan term by refinancing your remaining balance over a longer period, which may lower your monthly repayments. However, keep in mind that a longer term usually means you’ll pay more interest over the life of the loan.
Consider interest-only vs principal & interest repayments
The repayment type you choose can also affect how much you pay in the short and long term. If your priority is lower repayments in the short term, an interest-only loan may help, however Lenders will often have specific policies defining suitable borrowers. In Interest-only loans, your repayments are lower initially because you’re only paying the interest charged on the loan. However, your balance doesn’t decrease during this period, and repayments will increase once you switch to principal and interest.
You can also speak to one of our expert mortgage brokers if you’d like some help sifting through home loans, deciding which one’s right for you or submitting your loan application.
Meet our home loans expert, Stephen Zeller
Stephen has more than 30 years of experience in the financial services industry and holds a Certificate IV in Finance and Mortgage Broking. He’s also a member of both the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) and the Mortgage and Finance Association of Australia (MFAA).
Stephen leads our team of Mortgage Brokers, and reviews and contributes to Compare the Market’s banking-related content to ensure it’s as helpful and empowering as possible for our readers.