How to calculate home loan repayments

Most Australians dream of buying their own home but it can be confronting when you sit down and work out what you can actually afford. Suddenly your dream of owning a three bedroom home with a large garden and entertaining space has become a small two bedroom unit.

Your financial situation will ultimately define what you can afford to buy, so calculating your home loan repayments can be a great place to start.

Loan repayments are the payments you make to your lender to pay back the amount borrowed for a home loan (the mortgage principal). These loan repayments are calculated by the lender and include interest and any additional fees.

Many home loans have variable interest rates, which the lender may choose to raise or lower over the course of your loan term, which could affect the cost of your mortgage, both from month to month and over the long term. You can also choose to fix your home loan interest rate and keep your repayments consistent for a limited period of time.

Home loan repayments may be made monthly, fortnightly or weekly over the course of the mortgage term, which often lasts between 20 and 30 years. Each principal and interest repayment will lower your mortgage principal slightly until the loan is fully repaid.

You may choose to switch over to interest-only repayments for a limited time, which can help to reduce your monthly repayment costs. However, because these payments don’t reduce your mortgage principal, your home loan may take longer to pay off, and you may end up paying more in interest on your property over the long term.

One of the simplest ways to work out how much a home loan may cost you from month to month and over the long term is to use a mortgage calculator.

Simply enter a few details about your intended mortgage, such as how much you plan to borrow, how long you plan to take to pay it back, and the interest rate you’d prefer to pay, and the calculator can estimate both the cost of your monthly (or fortnightly or weekly) repayments, and the total cost of the mortgage over the long term.

Working out how much you can afford to borrow may be easier if you can break it down into loan repayments. The higher the cost of the home, the more you will need to borrow and the higher the repayments will be.

Work out an amount you can comfortably commit to paying towards your loan each week, fortnight or month, and use this repayment figure to determine the amount you can comfortably borrow. RateCity’s Borrowing Power Calculator can help you crunch some of these numbers and find an estimated borrowing amount.

If you’re not sure how much you may be able to afford to repay given your income and expenses, you can also check out RateCity’s How Much Can I Borrow calculator. Simply enter a few details about your household finances, and it will estimate how much money a bank or other mortgage provider may choose to lend you, to help account for the risk of future mortgage stress.