When engaged in the ancient art of real estate daydreaming it’s not unusual to look up an online mortgage calculator and see if you can afford those stunning homes on your favourite listing portal. You might wonder whether, if you ditched the kids’ judo and piano lessons, that glorious Hamptons-style dwelling with the pool and massive back yard might be within financial reach.
While it’s fun to mess about with the calculator, they do have their shortcomings. That said, knowing how to use an online mortgage calculator properly will definitely get you closer to achieving that extra bedroom in your forever home.
Here are some of the variables you need to factor in:
1. Additional fees and costs: Of course, if you’ve got a mortgage already, you’ll know that there are additional costs to buying and selling property that the mortgage calculator doesn’t allow for. Exit fees are a biggie, but there are administrative fees and establishment costs that can really punch a hole in your budget. There are some calculators that can assess standard fees, such as stamp duty and transfer costs, based on the state you live in. However, additional break fees and other hidden costs will still need to be accounted for when you are setting your budget.
2. Credit score: Your credit score will play a major role in the interest rate that a lender offers. This credit score may also trigger additional fees or insurance costs if the financier has any concerns.
3. Other variables: Most lenders today will use an average figure for your expenses called the Household Expenditure Measure (HEM) figure. This is embedded in many online calculators to help users assess borrowing capacity. It’s a model that was developed by the Melbourne Institute of Applied Economics in 2011 as a measure that reflects weekly household expenditure for various types of families. If your situation doesn’t fit the HEM model, then a calculator may not give an accurate result.
4. Accuracy: A calculator is only as accurate as the data that is input. There may be areas where you can make changes to your situation, such as discretionary spending, that will help increase your borrowing capacity – but a calculator won’t be able to help with that. Again, use the calculator as a rough guide only.
Understanding the flaws in using an online mortgage calculator will ensure you understand the result it provides – in other words, use the calculator is a guide only.
But don’t abandon the calculator altogether as they do have their place in educating homebuyers during the purchasing process.
An online mortgage calculator will give you the ballpark that you’re working in, helping you understand the price band you can afford when looking at homes.
A mortgage calculator is also extremely valuable in learning how additional repayments can shorten the life of your loan. By plugging in different scenarios and testing different conditions, you’ll be able to clearly and quickly see how your repayments schedule will shorten – or lengthen – the life or your mortgage. This is crucial knowledge when embarking on a decades-long loan!
Try it for yourself – visit our online mortgage calculator and test different scenarios. As an exercise, run two scenarios. Do one where you make repayments monthly, then do another where you pay the same total amount each month, but as weekly instalments. You’ll be surprised to discover how that affects the length of your loan.
Getting tailored advice
Whether you’re a first home buyer or more experienced and on the hunt for your forever home, nothing replaces the valuable information and advice that comes from a face-to-face meeting with an experienced mortgage broker who can offer tailored, personalised advice that is reflective of your situation.
There are many reasons why a face-to-face meeting with a mortgage broker is irreplaceable when heading down the home-loan path and seeking a mortgage, but here are my top three:
1. Personalisation: Once you have a rough guide of your borrowing capacity, you will be ready for a discussion with a mortgage broker. The broker will be able to see quickly and easily where improvements can be made to help you secure your loan. A broker understands that people can change their spending habits or adapt and modify their situation to reach a goal. A mortgage broker will be the expert advisor who can help you achieve that dream home.
2. Your advocate: While many Australians borrow directly from the bank, trust is a key issue as consumers increasingly view the major lenders as motivated by self-interest. A mortgage broker has a legal and fiduciary responsibility to act in their client’s best interests and they will work on your behalf. They are experienced at negotiating with lenders and will seek one that can take a common-sense approach to your application.
3. Expertise: While an online calculator can offer a rough guide as to your borrowing capacity, repayments can be different across different financial products. A broker can expertly advise you across those various offerings. A good broker will have knowledge about the range of loan structures and types offered by lenders and will be able to advise – based on your unique circumstances – about the best product for you. Tapping into that expertise to ensure you achieve the best outcome for your financial situation is smart thinking.
Taking out a mortgage to buy a home is a big step. Don’t be complacent – do your homework and you’ll be well prepared for a successful outcome.
The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.