Calculating your home loan repayments

When you take out a home loan, you will pay back your lender over the life of the loan the amount you borrow plus interest (and any other fees or charges). These are your mortgage repayments.

When considering your own repayment capabilities, you might start by applying the rule of 30 per cent. The rule is just a general guide and does not apply to all circumstances, but can provide a good starting point when estimating your repayments.

Home loans will typically require a monthly or fortnightly repayment schedule. These repayments will usually be a portion of the principal, with interest added to it. A home loan is made up of the principal, which is the amount you borrow, and the interest, which is how much the lender charges you for the borrowed amount. Think of it as a “rental charge” for the money you borrow.

If you are paid monthly, under the rule of 30 per cent your monthly repayments would not represent more than 30 per cent of your post-tax income. Borrowers who commit more than 30 per cent of their income to their home loan may be categorized as under mortgage stress in some cases.

Lenders may include a form of the 30 per cent rule when considering your application, as borrowers who fall into this category may be more likely to miss repayments or default on their loan.

For example, if you earn $900 per week, after tax, your monthly income would be roughly $3900. If applying the logic of the 30 per cent rule, the estimated monthly home loan repayment should be lower than $1170, including interest and any other fees or charges.

A key way to help avoid mortgage stress is to purchase a property you can afford, and be transparent with lenders about your income and spending habits.

When comparing home loans, it can be helpful to use the comparison rate in combination with looking at the advertised interest rate. The comparison rate calculation reflects both the interest rate and common fees, making it more simple to compare on more than just the interest rate.

When calculating what you can realistically afford in repayments, leaving a buffer can give you some wiggle room should interest rates change.

Owner occupier home loans can be fixed rate or variable rate.

Fixed rate home loans mean the interest rate attached to your mortgage stays the same for a set period of time. This period is often somewhere between two and five years. After the fixed rate period the loan will revert to a variable rate loan unless you refinance for another fixed term.

Variable rate home loans mean your interest rate can rise or fall with the market. Cash rate decisions made by the Reserve Bank of Australia (RBA) can influence the interest rate your lender charges you, and in turn, your repayments.

When calculating your home loan repayments, it can help to leave yourself a buffer should interest rates rise over the course of the loan.

Your repayment history is your record of repaying various kinds of credit. This may be credit cards, personal loans or car loans, for example.

According to the Office of the Australian Information Commissioner (OAIC), if a credit provider provides consumer credit to an individual, the following information about the consumer credit is repayment history information about the individual:

• Whether or not the individual has met an obligation to make a monthly payment that is due and payable in relation to the consumer credit
• The day on which the monthly payment is due and payable
• If the individual makes the monthly payment after the day on which the payment is due and payable—the day on which the individual makes that payment.

Put simply, your repayment history can reveal if you have been a trustworthy borrower in the past. This information can be reflected in your credit score.

A credit score is the number that helps to represent your reliability as a borrower. Lenders will use your credit score to help assess your application and identify your ability to make repayments on a home loan.

When working out what your home loan repayments might be, you’ll also need to consider how much of a deposit you may need. While not in all circumstances, lenders generally seek a 20 per cent deposit on a home loan. For example, if you have a $100,000 deposit, you would be able to purchase a $500,000 property, with a bank or lender letting you borrow the remaining $400,000.

If you do not have a 20 per cent deposit, you may need to pay for lenders mortgage insurance (LMI), which is an insurance policy that helps protect the lender should you default on the loan.

It’s important to understand that the deposit is not the only upfront cost to budget for when buying a property. Other costs may include:

Stamp duty
Stamp duty is a tax on the purchase of the property and is usually compulsory. It is a one-off payment to your State or Territory government. It covers the transfer of ownership from one owner to another.

The cost will depend on the State or Territory you live in, as well as the cost of the property or land you are buying. It will also depend on your income, whether you are an investor or owner occupier and the type of property.

Using a stamp duty calculator can help you estimate the cost of stamp duty in your State or Territory.

Conveyancing fees
When you purchase a property, you may require the services of a solicitor or conveyancer to prepare the documentation between you and the previous owner of the property and/or the lender.

Building and pest inspections
If you are in the process of searching for a property, many buyers choose to pay for a building and pest inspection before buying. These inspections check for structural issues with the dwelling, and for long-term risks like termites or other unwanted creepy-crawlies.

These costs can quickly eat away at a healthy home deposit – potentially bringing your deposit under the needed 20 per cent – and should be considered before you start your repayment calculations.

First home buyers may be relying on savings to act as their deposit for a home loan. If you already own a property, it may be possible to use equity in your existing home to help with the deposit for another property.

Equity is the difference between a property's value and what’s owed on the loan. For example, you purchased a house five years ago for $500,000, with a $400,000 loan. It is now valued at $550,000 and you have paid off $50,000 of the mortgage. In this instance, you would now have an estimated $200,000 in equity ($550,000 value minus $350,000 loan). Depending on your circumstances, you may then be able to use some of this equity as a deposit for another property.

It’s important to note some lenders may only allow you to use up to 80 per cent of the property's value minus the remaining debt. In the above example, 80 per cent of $550,000 would be $440,000. Therefore the equity you can may be able to use would only be $90,000 ($440,000 minus $350,000 remaining on the loan).

You may also be able to access equity in your existing property through refinancing, a line of credit loan, or a reverse mortgage.

The decision to use equity or savings is up to you. It will ultimately be influenced by what property you wish to buy, how much equity you may have access to and your own savings.

How much you should borrow depends on your own circumstances and goals, and what you can ultimately afford to repay.

When assessing home loan applications, lenders will consider your loan-to-value ratio (LVR). LVR is a percentage that represents the amount owing and the value of the property. The higher the deposit, the lower the LVR.

For example, if you apply for a home loan of $400,000 for a property valued at $500,000, your loan to value ratio would be 80 per cent.

LVR can help guide you when calculating how much you may be able to borrow. Borrowing more than 80 per cent of the property's value may mean paying LMI which may add thousands to your costs over the life of your loan. There are options you can explore, if you’re eligible, which may help you avoid the impacts of LMI such as government initiatives or having a guarantor.