Mortgage Calculator Australia

How the mortgage calculator works

The calculator begins with the property price and deducts the deposit to determine the base loan. Dividing the base loan by the price gives the loan to value ratio, or LVR. Where the LVR exceeds 80%, an indicative lenders mortgage insurance premium is estimated and added to the loan, which is the most common way the premium is paid in practice. The monthly repayment is then calculated on the resulting loan with the standard amortisation formula, using the interest rate and the term entered, on a principal and interest basis at a constant rate.

Alongside the repayment, the calculator estimates transfer duty for the selected state or territory and buyer type, and adds an indicative allowance of approximately $3,000 for conveyancing, inspections and related costs. The deposit, the duty and that allowance together form the upfront funds required. Total interest is the sum of all repayments over the term less the amount borrowed. Each figure is an estimate intended to show how the parts of a purchase fit together, and none is a quote from a lender, an insurer or a revenue office.

Entering the property price, deposit, rate and loan term

The property price should be the expected purchase price, since both the duty estimate and the LVR are based on it. Lenders rely on their own valuation, and where a valuation falls below the contract price the LVR is generally measured against the lower figure. The deposit entered should be the cash contributed towards the price itself. Savings that will be consumed by duty and legal costs are not part of the deposit, and a frequent error is to enter total savings in the deposit field.

The interest rate should reflect the type of loan under consideration. Lenders commonly price loans by purpose and by LVR, so that investors and borrowers with smaller deposits may be offered higher rates than owner-occupiers with larger deposits. A rate from a written offer is the most reliable input, and an advertised rate for a comparable product is a reasonable substitute. The term may be set between 10 and 30 years. Most new loans are written over 25 or 30 years, and the choice has a substantial effect on total interest.

The state or territory and the buyer type complete the inputs. The jurisdiction is the one in which the property is located, and not the one in which the purchaser currently lives. The first home buyer category should be selected only where every purchaser is likely to satisfy the eligibility conditions of that jurisdiction, since a concession applied in error would understate the upfront funds required. Purchasers who intend to live in the property select owner-occupier, and those buying to let select investor.

Loan to value ratio and lenders mortgage insurance

The LVR is one of the most important measures in Australian home lending. A lower LVR represents lower risk to the lender, and it may attract sharper pricing and a wider choice of products. Where the LVR exceeds 80%, most lenders require lenders mortgage insurance. The policy protects the lender, not the borrower, against a shortfall if the property is sold following default. The borrower pays the premium, either in cash at settlement or, more commonly, by adding it to the loan, in which case interest accrues on it for the life of the loan.

Premiums rise steeply with the LVR and with the size of the loan. The calculator applies an indicative premium scale in bands up to 85%, 90% and 95% and shows no estimate above 95%, because most lenders will not lend beyond that level without a guarantor or the support of a government scheme. Actual premiums vary between insurers and lenders, and some lenders waive the requirement for particular professions or for participants in a government guarantee scheme. The LMI calculator examines the premium and the deposit needed to avoid it in more detail.

Transfer duty by state and buyer type

Transfer duty, commonly called stamp duty, is a state or territory tax payable when property is bought or otherwise acquired. State revenue offices assess it on the dutiable value of the property, generally by reference to the purchase price, using a sliding scale under which the marginal rate rises with the value. The rules, thresholds and payment deadlines differ in each jurisdiction, which is why the calculator asks for the state or territory. Duty is normally paid in cash at or near settlement and is frequently the largest purchase cost after the deposit.

The buyer type affects the estimate. The calculator offers three categories: first home buyer, owner-occupier and investor. Several jurisdictions provide an exemption or concession to eligible first home buyers, generally subject to a price cap and to residence requirements, and some apply concessional rates where the property will be the principal place of residence of the purchaser. Investors generally pay the full general rate. Foreign purchasers may be liable for additional duty, which the calculator does not model. Eligibility rules change, and the relevant revenue office publishes the current position.

Worked example: a 20% deposit compared with a 10% deposit

Consider an illustrative purchase at $800,000, financed over 30 years at a hypothetical rate of 6.00%. With a deposit of $160,000 the base loan is $640,000 and the LVR is 80%, so no lenders mortgage insurance applies. The monthly repayment is approximately $3,837 and total interest over the term is approximately $741,000. The upfront funds required are the $160,000 deposit, plus the transfer duty for the relevant jurisdiction and buyer type, plus the indicative allowance of approximately $3,000 for legal and related costs.

With a deposit of $80,000 the base loan is $720,000 and the LVR is 90%. On the indicative scale used by the calculator, the premium is 1.8% of the base loan, or $12,960, which is capitalised to give a loan of $732,960. The monthly repayment is approximately $4,394, about $557 more than in the first scenario, and total interest is approximately $849,000. Of the increase in the repayment, about $78 per month is attributable to the capitalised premium, which means that approximately $28,000 is repaid over 30 years in respect of a premium of $12,960.

The example does not show that either course is preferable. Saving the larger deposit takes time, during which prices, rents and interest rates may all move in either direction, while the smaller deposit allows an earlier purchase at a higher ongoing cost. The purpose of the comparison is to make the cost of each course visible in dollar terms. All figures are hypothetical, assume a constant rate and rely on an indicative premium scale. They are not a forecast or a recommendation.

How Australian lenders assess a home loan application

A lender does not approve a loan on the basis of the repayment at the current rate. The Australian Prudential Regulation Authority expects authorised lenders to assess whether a borrower could meet repayments at an interest rate at least 3.0 percentage points above the actual loan rate. APRA has described this serviceability buffer as a contingency for rate rises and for unforeseen changes in the circumstances of a borrower. Lenders also examine income, living expenses, existing debts and credit history, and they apply their own policies on matters such as acceptable property types and genuine savings.

In the illustrative $640,000 loan above, the repayment at 6.00% is approximately $3,837 per month. A lender applying the buffer would test the application at a rate of 9.00% or more. The calculator may be used to approximate this by raising the rate by three percentage points and noting the result. The borrowing power calculator approaches the same question from the perspective of income and expenses, and the property affordability calculator converts savings and income into an indicative price range.

Common mistakes when using a home loan calculator

The most frequent error is to treat all savings as deposit. In the illustrative example, a buyer holding exactly $160,000 would not achieve an 80% LVR, because duty and other costs must be met from the same funds. The effective deposit would be smaller, the LVR higher and a premium likely. A second error is to overlook costs the calculator does not itemise, including mortgage registration and transfer fees, lender establishment fees, removal costs and adjustments for council and water rates at settlement.

A third error is to concentrate on the monthly repayment and disregard total interest. A small change in rate or term may appear minor each month and still amount to a large sum over decades. A fourth is to assume that a first home buyer concession will apply without verifying the price caps and eligibility conditions in the relevant jurisdiction. Finally, the constant rate assumption should be kept in mind: the Reserve Bank of Australia notes that lending rates move with the cash rate and other factors, and most Australian loans carry a variable rate.

Acting on the result and related decisions

The result is most useful as a basis for comparing scenarios. Borrowers may test a larger deposit against an earlier purchase, a 25-year term against a 30-year term, or one price point against another, and observe the effect on the repayment, the upfront funds and the total interest. Where the upfront funds exceed available savings, the options generally include a lower price, a longer saving period, assistance available to first home buyers or, in some cases, a family guarantee. Each has consequences that warrant careful consideration.

Several related BorrowWise tools provide more detail on individual components. The stamp duty calculator sets out duty and concessions by jurisdiction, the deposit calculator estimates the time needed to reach a savings target, and the mortgage repayment calculator shows weekly and fortnightly repayments with a year-by-year breakdown. Once a loan is in place, an offset account, additional repayments and periodic refinancing reviews are the main means of reducing its cost. All results are general information only and do not take account of individual objectives, financial situation or needs.