Knowing how to calculate your mortgage repayments is a key part of making informed home-buying decisions. Whether you’re purchasing your first home or investing in property, understanding your financial commitments will help you budget confidently and plan for the future.
This guide walks you through the process of calculating mortgage repayments step by step, using straightforward examples tailored to the Australian property market.
Step 1: Gather the Essential Details
To begin calculating your repayments, you’ll need the following:
- Loan amount: The amount you intend to borrow after your deposit.
- Interest rate: The annual percentage rate (APR) offered by your lender.
- Loan term: The length of time you’ll take to repay the loan (e.g. 25 or 30 years).
- Deposit: The amount you’re paying upfront towards the purchase.
- Additional costs (if applicable): Council rates, lender’s mortgage insurance (LMI), and home insurance may be included in some repayments.
Step 2: Convert the Interest Rate to a Monthly Rate
Since mortgage repayments are usually made monthly, you’ll need to convert the annual interest rate into a monthly rate.
Formula:
Monthly Interest Rate = Annual Interest Rate ÷ 12
Example:
If your annual interest rate is 5%:
0.05 ÷ 12 = 0.00417 (or 0.417%)
Step 3: Calculate the Total Number of Repayments
Multiply the loan term by 12 to find the total number of monthly repayments.
Formula:
Total Payments = Loan Term (in years) × 12
Example:
For a 30-year mortgage:
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30 × 12 = 360 repayments
Step 4: Use the Mortgage Repayment Formula
The standard formula used to calculate your monthly principal and interest repayment is:
M = P × [r(1 + r)^n] ÷ [(1 + r)^n – 1]
Where:
- M = monthly repayment
- P = loan principal (amount borrowed)
- r = monthly interest rate
- n = total number of payments
Step 5: Plug in the Numbers
Let’s say you’re borrowing $200,000 at a 4% annual interest rate over 30 years (360 monthly repayments):
- Loan principal (P): $200,000
- Monthly interest rate (r): 0.04 ÷ 12 = 0.00333
- Total repayments (n): 30 × 12 = 360
Now apply the formula:
M = $200,000 × [0.00333(1 + 0.00333)^360] ÷ [(1 + 0.00333)^360 – 1]
Solving this gives a monthly repayment of approximately $954 (principal and interest only).
Step 6: Factor in Additional Costs
Aside from the principal and interest, your actual monthly outgoings may include:
- Council rates
- Home and contents insurance
- Lender’s Mortgage Insurance (LMI) if your deposit is under 20%
- Strata fees (for units or apartments)
- Repayment buffers for future interest rate rises
Some lenders offer the option to package these into your monthly repayment. Others may require separate payments, so be sure to clarify with your lender.
Why This Matters
Understanding how to calculate your repayments:
- Helps you set a realistic budget
- Allows you to compare home loan products
- Prepares you for fluctuations in interest rates
- Empowers you to negotiate with confidence
Even if you plan to use an online mortgage calculator (which is handy for quick estimates), learning the process behind the numbers gives you a deeper understanding of your finances and the long-term implications of your loan.
Final Tip
Always leave a financial buffer in your monthly budget to accommodate for potential interest rate changes or unexpected expenses. And if you’re unsure, speak with a mortgage broker or financial adviser to tailor a solution to your circumstances.