Loan calculators can be useful but you need to be careful when interpreting the results of different calculators on different websites. Different lenders have different calculation methods so… which one are you going to get?
For example How much can I borrow? Calculators on Infochoice, Mortgage Choice and realestate.com.au all came up with different borowing amounts for the same inputted information. So why are they different? Who to believe?
Mortgage Calculators produce different results because:
- Lenders use different interest rate types. That is, most Australian lenders use an interest rate greater than the current actual variable rate to assess your ability to repay a home loan. They use the rate applicable to your mortgage increased by a buffer amount to reflect a safety margin in case your mortgage rate increases over time. They want to see you can withstand rate increases with your current income and expenses. Each lender uses a different “buffered” interest rate.
- Each lender makes their own assumptions about your average monthly expenses based on a typical family of your size (single person, married couple, married with one child, married with two, etc) these may be based on specific statistics like the Henderson Poverty Index, or simply their own in-house calculations. So where lenders have different assumptions, different maximum borrowing amounts will result.
Here is a link to the mortgage calculators on Moneysmart.gov.au the Australian government site, for: How much can you borrow; How much you can afford; repayments per month, etc. I chose this one as a starting point because they are not directly associated with one lender – and therefore the calculator is not associated with just one lender’s calculation method. They also list their assumptions and fine print so you can take a look at them for yourself.
(www.moneysmart.gov.au/tools-and-resources/calculators-and-tools/mortgage-calculator/)
Your borrowing power according to a bank is one thing : what’s more relevant is “how much in repayments per month can I really afford?” this is the question you need to ask.
Australian lenders will take into account proposed rental income for an investment property you buy in Australia. Generally speaking they take 75% or 80% of the gross rent you expect to earn, and add this to your income sources when working out your ability to repay an investment property loan. They do not use 100% of the rent income usually, to factor in an allowance for rental property expenses and periods of vacancy.
If you are borrowing for a future home, take the amount of rent you pay today. How comfortable are you within your current income and other monthly expenses in paying this amount of rent? How much more could you potentially pay, before you had no buffer for emergencies or occasional over-spending in your monthly budget?
With the knowledge of how much you are prepared to pay, we can work out the property purchase price you could potentially afford, and this will be a much more accurate guide to your borrowing ability compared to how much a lender or a website’s borrowing calculator suggests you are able to borrow.