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A mortgage is a necessary part of buying a home for many Australians, but it can be difficult to understand what you can actually afford. However, with home loan interest rates on the march, and the RBA indicating that rates are likely to keep rising in 2023, it’s more important than ever to know your budget inside and out so you can cover your mortgage repayments and factor in a buffer for rainy days. Our mortgage repayment calculator can help you do just that:
How to Calculate Mortgage Payments Using Our Calculator
Whether you’re shopping around for a mortgage or want to understand the costs of your current loan, a mortgage calculator can offer insights into your monthly payments. Follow these steps to use the Forbes Advisor mortgage calculator:
- Enter the loan amount. Start by adding the total amount of the money you are planning to borrow. If you don’t have a specific amount in mind, you can experiment with this number to see how much you can afford. And if you’re considering making an offer on a home, this calculator can help you determine how much you can afford to pay.
- Input your loan term. Next, add the loan term, which is the time it will take to pay off your mortgage. Most lenders will allow you to select a loan term, with the most common being between 15 and 35 years. The longer the loan term, the lower the repayments, but the more you will pay over the long term in interest.
- Enter your interest rate. If you’ve already shopped around for a loan and have spotted a range of interest rates, enter one of those values into the interest rate box on the left. If you haven’t researched interest rates yet, do a quick check of what the market is offering and add the value into the box.
- Repayment frequency. Select how often you plan to make payments: weekly, fortnightly of monthly repayments. You can also use this feature to calculate the loan amount over various time frames. Note: that while many people elect for monthly loan repayments, you will pay off your mortgage sooner if you elect for weekly instalments.
- Make extra repayments. This function allows you to see how much your mortgage will be if you make extra repayments on top of the required loan amount. The more additional money you pay off, the lower the total cost of the loan and interest paid.
- Review your loan details. Once you enter all of the relevant information on the left side of the screen, the calculator will auto-populate your payment breakdown on the right. This portion of the calculator lets you view your monthly payments as well as the total cost of the loan, and the total interest paid.
Note: the calculator is intended as a guide only, and does not take into account any account-keeping fees attached to the loan or the impact of maintaining an offset account.
Mortgage Fees and Costs
If this is your first time shopping for a mortgage, the terminology can be intimidating. It also can be difficult to understand what you’re paying for—and why.
Here’s what to look for when reviewing your mortgage costs and fees:
- Principal: Principal is the amount of money you borrowed on the mortgage. A portion of each payment will go toward paying this off, so the number will go down as you make monthly payments. In Australia we have what is known as interest only loans. These are much cheaper than principal and interest loans—especially at first—
- Interest rate: This is essentially what the lender is charging you to borrow the money. Your interest rate is expressed as a percentage and may be fixed or variable. The RBA has been raising rates through much of 2022, spelling the end of Australia’s historically low cash rate, which at the beginning of 2022 sat at .1% It was not uncommon for borrowers to secure loans beginning with a two.
- Package fees: Certain loans will come with a package fee, especially if there are a number of bells and whistles attached, such as an off-set or credit card.
- Upfront fees: Applying for a mortgage and buying a property can be expensive. Make sure you factor in application fees, conveyancing fees, any government charges, and mortgage registration fees.
- Ongoing fees: You may also need to factor in fees if you switch to another lender, pay off the loan too early, redraw or miss a repayment.
- Home and contents insurance: Home and contents insurance protects you and your lender in the case of damage to your home. Contact your local insurance agent to get a quote or access a range of free quotes online.
- Mortgage insurance: Also known as lenders mortgage insurance, or LMI, this protects the lender in case you default on your mortgage, and you will need to factor this in if your deposit is less than 20%. Try to avoid this as much as possible as the insurance can easily add thousands, sometimes tens of thousands, to the cost of your loan.
- Stamp duty: Last but not least, we come to stamp duty, a levy that is imposed by each state as a percentage of the purchase price of the property. For example, in Victoria, it is calculated on a sliding scale and starts at 1.4% if the property is valued at $25,000 and reaches as much as 5.5% if the property is valued at or above $960,000—which is most properties in Melbourne. Stamp duty is a controversial tax, adding tens of thousands of dollars to state coffers with every purchase, and NSW has since added an alternative option for homeowners to pay an annual land tax instead of the hefty up-front slug.
Estimating How Much You Can Afford
How much you can afford depends on several factors, including your monthly income, existing debt service and how much you have saved for a deposit. When determining whether to approve you for a certain mortgage amount, lenders pay close attention to your credit score, you assets and your liabilities.
Keep in mind, however, that just because you can afford a house on paper doesn’t mean your budget can actually handle the payments. Beyond the factors your bank considers when pre-approving you for a mortgage amount, consider how much money you’ll have on-hand after you make the deposit. It’s best to have at least three months of payments in savings in case you experience financial hardship.
Along with calculating how much you expect to pay in maintenance and other house-related expenses each month, you should also consider your other financial goals. For example, if you’re planning to retire early, determine how much money you need to save or invest each month and then calculate how much you’ll have leftover to dedicate to a mortgage repayment.
Ultimately, the house you can afford depends on what you’re comfortable with—just because a bank pre-approves you for a mortgage doesn’t mean you should maximise your borrowing power.
What Is the Best Mortgage Term for You?
A mortgage term is the length of time you have to pay off your mortgage. The most common mortgage terms are between 20 and 30 years. The length of your mortgage terms dictates (in part) how much you’ll pay each month—the longer your term, the lower your monthly payment. That said, you’ll pay more in interest over the life of a 30-year loan than a 20-year one.
To determine which mortgage term is right for you, consider how much you can afford to pay each month and how quickly you prefer to have your mortgage paid off.
If you can afford to pay more each month but still don’t know which term to choose, it’s also worth considering whether you’d be able to break even—or, perhaps, save—on the interest by choosing a lower monthly payment and investing the difference.
How to Get a Lower Mortgage Payment
There are several ways you can secure a lower monthly payment on your mortgage:
- Choose a longer term
- Have a larger deposit
- Choose a lower-priced property
- Secure a lower interest rate
How to Choose a Mortgage Lender
You have many options when it comes to choosing a mortgage lender. Banks, credit unions and online lenders all offer mortgages directly, while mortgage brokers and online search tools help you compare options from different lenders.
It’s important to make sure you feel comfortable with the broker or company you’re working with because you’ll need to communicate with them frequently during the application process—and in some cases, after the loan closes.
You may want to start with the banks or other institutions where you already have accounts, if you like their service. Also, ask your network of friends and family, and any property professionals you’re working with, for referrals. However, be aware that as rates rise, it’s important to lock in the lowest rate you can and to keep reviewing it. Many borrowers stop shopping around once they secure a loan, and end up paying a ‘loyalty tax’: that is, because they don’t pressure their bank to lower their rate in line with introductory offers, they end up paying a lot more than they need to.
The advice and information provided by ForbesAdvisor is general in nature and is not intended to replace independent financial advice. ForbesAdvisor encourages readers to seek expert advice in relation to their own financial decisions.
FAQs
Do mortgage repayments decrease over time?
Whether or not your mortgage repayments go up or down over time, has more to do with the interest rate you are paying rather than how much time you have left on the loan. What does happen is that make-up of the loan changes over time: in the beginning, borrowers are paying off mainly interest on the loan, but as the loan progresses, you pay down more and more of the actual principal.
How can I pay off my loan faster?
There are many things that borrowers can do to ensure they pay off their loan as soon as viably possible. This includes paying extra off each month; switching to fortnightly rather than monthly pay cycles as there are fewer monthly pay periods; using an off-set account to reduce the amount of interest paid; and re-negotiating a lower interest rate with your lender on a regular, perhaps annual, basis.
How do mortgage repayments work?
Mortgage repayments in Australia can be weekly, fortnightly or monthly, and usually the bank takes out the repayment at the designated date as a direct debit. While it may seem easier to pay your mortgage on a monthly basis, if you opt for weekly repayments then you will pay off the loan faster as there are more weekly payment cycles than monthly. Most homeowners opt for a principal and interest loan (P&I), while some investors prefer interest-only loans because these loans are cheaper, at least initially. If you have a variable interest rate—rather than a fixed—then you will be subject to the movements in the RBA cash rate. When rates go up, your mortgage will too. When rates are reduced, then your mortgage should decrease, as well—although some banks have been criticised in the past for not passing on rate reductions to their costumers, while unfailingly passing on hikes.
