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.

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

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.

Compare home loans in Australia