A home loan calculator can take much of the work out of calculating the cost of a home loan. But if you want to use one to its full effectand get an accurate picture of what you can afford, there are a few things you should be aware of.
What goes into calculating the cost of a home loan?
Generally, the cost of your home loan will be based on the amount you borrow – known as the loan principal – and the interest charged on that loan. It will also include any ongoing fees or charges, such as account keeping fees.
The amount you pay each month will also be affected by whether you take out an interest only loan or whether you’re paying off both principal and interest. Most homeowners choose to pay a principal and interest loan because it means that, so long as they meet their repayments, they should own their home outright once the loan is paid off.
How does my interest rate affect my loan repayments?
The next important factor in calculating the cost of your home loan is your interest rate.
If you take out a home loan with a variable rate, the interest rate applied to your home loan may change. That means the amount of your repayments may go up and down too. If you choose a fixed rate home loan, you’ll have the certainty of knowing how much your repayments will be for a set period of time – usually somewhere between one and five years.
A third alternative is to fix the interest rate on part of your home loan so that you have a degree of certainty while leaving the rest on a variable rate so that you won’t be disadvantaged if the interest rate goes down. This is known as a split rate. You can read more about fixed and variable interest rates here.
It’s important that you look beyond the headline interest rate and apply the comparison rate. That’s because the comparison rate also takes into account most ongoing loan related fees and charges you’ll need to pay, on top of any principal and interest charges. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are generally not included in the comparison rate.
What happens to my home loan repayments if I make extra contributions?
If you make extra repayments, or if you contribute to an offset account or redraw facility (if available), it will reduce the term of your loan but it generally won’t reduce the cost of your ongoing repayments.
If you’d like to reduce the amount you need to repay each week, fortnight or month, you’ll generally need to refinance your loan or fix all or part of your home loan at a rate that’s below the variable rate.
How much can I borrow?
Once you’ve worked out the cost of your home loan, you’ll generally be able to figure out an estimate how much you can borrow, based on your monthly, fortnightly or weekly budget. To help make this task even easier, our Home loan calculator lets you enter your regular income and expenses. You can then compare what is coming in and what is going out to the price of the home you’re looking to buy and the amount you’ll likely need to borrow to purchase it.
That way you can tell whether you would likely be able to repay your loan and maintain your current lifestyle, or whether you would be stretched or even struggling.
Want to know more?
Call us on 0448 333 666 to talk through your options.
The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, we that you consider whether it is appropriate for your circumstances. We recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.
