Mortgage Calculator: Why Do I Need to Use One?

Mortgage Calculator: Why Do I Need to Use One?

When searching the web for mortgage information, you often see pages with a mortgage calculator. “Mortgage calculator” has already become the most popular mortgage-related web search in the UK! But what exactly are mortgage calculators? How do they work, and most importantly, why do I need to use one? Let’s find out.

What is a mortgage calculator? In a nutshell, it is a simple tool on a web page, that will calculate your possible mortgage repayments for your circumstances. You provide information about your mortgage, such as the loan amount, the term, and the interest rate, and the calculator will tell you how much your monthly payments are.

How do I use a mortgage calculator? You see a lot of different mortgage calculators on the web, but they essentially all work in the same way. You need to give the calculator 3 inputs: the loan amount, the term, and the interest rate. The calculator will then provide you with 2 figures: a monthly repayment amount, and an “interest-only” repayment amount. Let’s have a look at these inputs and outputs in more details:

Loan amount: this might be called “mortgage required”, “your mortgage” or “mortgage amount”. It is basically the amount you want to borrow from a mortgage lender. This does not include the upfront place usually required by most lenders.

Mortgage term: also called “repayment period”, or “loan term”. This is the period over which you want your mortgage to be repaid. If you choose a short mortgage term your monthly repayments will be higher, but you will pay less interest overall. A longer mortgage term will consequence in smaller mortgage payments, but you will pay more overall for your mortgage, as interest has to be paid for each additional year for which you want your mortgage.

Mortgage interest rate: this is the interest rate applied by the lender for your mortgage. There are a lot of different mortgage types: variable, fixed and some lenders offer a discounted interest rate period during the initial years of the mortgage. You consequently need to go into the interest rate applicable for the term you choose. For example, if a lender offers a discounted rate of 3% for 2 years, you can use the calculator to calculate the repayment for these initial 2 years. If another rate applies after this period, you can then use the calculator to calculate the repayments, taking into account that part of the loan will have been repaid.

Monthly repayment amount: also called “monthly repayments”, it is simply the amount you will have to pay back to your lender every month to repay your mortgage.

Interest only repayment: this is the monthly repayment in the case of an interest-only mortgage, where your repayment only covers the interest and not the loan amount. In an interest only mortgage, the loan is not repaid at the end of the term.

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