How to Calculate Mortgage Repayments in Australia
For many Australians, buying a home is a significant milestone in their lives. However, navigating the world of mortgages can be overwhelming, especially when it comes to understanding how one can calculate mortgage repayments.
How much is repayment on a mortgage? As of June 2023, the average initial monthly repayment on a $500,000 mortgage for a 25-year loan with a 5.00% per annum interest rate is $2,923. How can you calculate that number? How can you find out how much you need to have per month for your mortgage payments?
In this article, we will explore the process of calculating mortgage repayments. This should help you to make informed decisions as a homeowner. Whether you’re a first-time home buyer or looking to refinance your existing loan, understanding the intricacies of mortgage repayments is essential to your financial well-being.
Understanding Mortgage Basics
To comprehend mortgage repayments, you need to grasp the fundamentals of a mortgage itself. So, a mortgage is defined as a loan obtained from a financial institution, whether it’s a bank or a lender, to finance the purchase of a property. This property can be a house, an apartment, or some other type of property.
The lender gives you, the borrower, the money needed to purchase the property. In exchange, you agree to pay back the loan, with added interest, over an agreed-upon period. For most Aussies, a mortgage repayment is their biggest monthly expense.
It’s crucial for you as a borrower to know ahead of time whether you can afford that dream property. You need to ascertain if you can stay on top of your repayments each month for the next 25-30 years. The good news is that a mortgage broker can help you understand your potential repayments, and your borrowing power, from your first appointment.
Now, in Australia, various mortgage types are available to borrowers. These include fixed interest rate and variable interest rate mortgages. A fixed-interest rate mortgage maintains a constant interest rate throughout the agreed fixed rate period, helping to provide stability in repayments at the start of your loan. On the other hand, a variable interest rate mortgage comes with an interest rate that can fluctuate, depending on market trends, thereby affecting your monthly repayments any time there is an interest rate change from your lender.
Key Mortgage Terminology and Factors Affecting Mortgage Repayments
Before you can start calculating your monthly home loan repayments, you should first familiarise yourself with some of the terms used by mortgage brokers, lenders, and real estate agents. Mortgage repayments are also influenced by several factors. These factors will have an impact on how much you have to pay every month for your home. Understanding what these terms and factors are can help you better understand mortgage repayments and to manage your finances more effectively.
The initial amount borrowed, which constitutes the purchase price of the property. This includes the cost of the house as well as any fees related to setting up your home loans or lender’s mortgage insurance (LMI).
Interest and Interest Rates
Interest is the cost of borrowing money from the lender, which is expressed as a percentage of the principal. Interest rates dictate how much interest a borrower pays when repaying a home loan. These two play a significant role in determining the size of your mortgage repayments. A higher interest rate leads to larger monthly payments, while a lower rate reduces the repayment amount.
Loan Term or Length of the Loan
The loan term is the length of time in which the borrower must repay the entire loan. The length of the loan term significantly impacts the total cost of your mortgage. Longer terms may result in lower monthly payments, but you will pay more in interest over time.
The total amount borrowed (principal) directly affects your repayments. Larger loans result in higher monthly payments. The loan amount is influenced by a number of factors, which include the kind of home you’re planning on purchasing, your current financial standing, your deposit, and other factors your chosen lender or bank believes are important to their assessment.
A deposit is a percentage amount of the property purchase price. It shows the seller you are committed to purchasing, and it shows the lender your ability to save and manage your money.
Your deposit has a bearing on how much you need to borrow towards the purchase of your chosen property. It also helps determine your interest rate and the kind of loan you’re eligible for.
A home loan deposit plays a big part when you calculate home loan repayments. The bigger your deposit, the less you need to borrow, which will then equate to smaller monthly payments on your mortgage.
Your initial home loan repayments are usually set up as a fortnightly or monthly payment. However, the more frequently you make repayments, the more you’ll save in interest over the life of your mortgage. Interest is calculated daily, so if you pay off your loan early, you could end up paying less interest than if you paid off your loan late.
There are many repayment schedule options available, and a professional mortgage broker can help you understand which is right for you and help you set it up with your lender.
There are various types of repayment plans you can choose from, like principal and interest repayments and interest-only repayments. You should know which repayment types suit your situation.
The first option gets you to pay a bigger amount since you’re paying both the principal and the interest portion of the loan at the same time. This scheme helps lower your overall loan costs.
In the second option, your repayment amount is lower because you’re only paying the interest. Since you’re paying more slowly, and interest rates can fluctuate based on multiple factors, this can make the overall cost of the loan bigger.
Additional Costs and Fees
There is a range of fees that come with buying property in Australia. These can include LMI, stamp duty, conveyancing costs, legal costs, valuation costs, and other miscellaneous costs. Some of these fees can be included in your home loan with your lender and therefore part of your monthly repayment.
Other fees will need to be paid upfront as part of your sales contract. Mortgage insurance, application fees, and other associated costs may increase your total loan amount and, consequently, your repayments.
By working with a mortgage broker, you will never pay for our services (because we are paid by the lender and this is not passed on to you) and we can advise you on what different fees you will have depending on loan type, lender and your deposit amount.
The Mortgage Repayment Calculation Formula
Calculating mortgage repayments can be done using a simple formula. In Australia, the most common method used is the Fixed Monthly Interest Repayment formula. The formula is:
M = P * [r * (1 + r)^n] / [(1 + r)^n – 1]
M = Monthly repayment amount
P = Principal (loan amount)
r = Monthly interest rate (annual interest rate / 12)
n = Total number of monthly payments (loan term in years * 12)
Let’s flesh out this formula with an example:
Suppose you borrow $500,000 at an annual interest rate of 4.5% for a loan term of 25 years.
Step 1: Convert the annual interest rate to a monthly rate:
r = 4.5% / 12 = 0.375%
Step 2: Convert the loan term to the total number of monthly payments:
n = 25 years * 12 = 300 months
Step 3: Calculate the monthly repayment amount using the formula:
M = 500,000 * [0.00375 * (1 + 0.00375)^300] / [(1 + 0.00375)^300 – 1]
Mortgage = $2,777.75
Using Online Mortgage Calculators
In the digital age, online mortgage calculators have become invaluable tools for prospective homeowners. User-friendly calculators allow you to estimate your mortgage repayments based on your loan amount, interest rate, and loan term without having to drain your brain doing so.
Many online calculators incorporate additional features, such as factoring in extra repayments or considering the benefits of offset accounts.
To use an online mortgage calculator, here are the usual steps to follow:
- Input the loan amount, interest rate, and loan term.
- Click the “Calculate” button to generate an estimated monthly repayment amount.
- Experiment with different scenarios to see how adjustments affect your repayments.
Let Professional Lending Solutions Help You Calculate Mortgage Repayments!
Understanding how to calculate mortgage repayments is fundamental in preparing for your monthly financial obligations. By grasping the basics of mortgages, analysing the factors influencing repayments, and using online calculators, you can confidently manage your mortgage responsibilities.
Working out a suitable mortgage repayment plan can take a lot of paperwork, time, resources, and energy. Trying to calculate house loan repayments can also be tricky.
To make things easier, you may want to consider getting advice from a licensed professional.
At Professional Lending Solutions, we will explain all your available finance options and answer any questions you may have in terms that are simple and easy to understand. We can also help crunch your numbers for you!