The calculations involved in finding out how big a home loan you can afford, how much your monthly home loan repayments will be, or how you are affected by an interest rate change, can be very daunting to some people. This article hopes to shine a light on these home loan calculations and take the "voodoo" out of it for you.
The Present And Future Value Of Money
Think about one lonely Rand. There isn't much one can buy for one Rand anymore, is there?
When I was still at school, I could buy a cooldrink, a sausage roll and a packet of chips from the tuck-shop with one Rand, and still get some change! Today I would be lucky to get four chappies for the same one Rand coin.
What happened to my Rand? Time happened. My one Rand today will most probably be worth even less tomorrow and even less next year.
Because of inflation, money today is worth more than money tomorrow. That is why we pay interest on borrowed money.
The future value of an amount of money can be calculated. There is actually a whole section of financial math dedicated to such calculations. These calculations can become quite confusing, so we won't discuss them in detail here.
There are easier alternative ways to get reasonably accurate answers to our questions.
Home Loan Repayment
To calculate how much your monthly home loan repayment (PMT) would be for a certain home loan amount (PV), you could calculate:
Where PMT is the monthly home loan repayment, PV is the loan amount, i is the monthly interest rate and n is the number of payments.
Or you could use a table of bond repayment factors, devide the bond amount by 1000, and multiply by the relevant factor:
Where PMT is the monthly home loan repayment, PV is the home loan amount and f is the bond repayment factor.
You could also use an advanced pocket calculator, or a spreadsheet computer program, and enter the values for PV,i and n. These computers will do the difficult calculation for you. You could also try the RealFact Home Loan Repayment Calculator
Home Loan Amount
If you already decided how much you can afford to repay a home loan on a monthly basis, you can calculate the home loan amount by:
Where PV is the loan amount, PMT is the monthly home loan repayment, i is the monthly interest rate and n is the number of payments.
Or you could use your trusty bond repayment factor table, devide the monthly payment by the relevant factor, and multiply by 1000:
Where PV is the home loan amount, PMT is the monthly home loan repayment and f is the bond repayment factor.
You could also use the RealFact home loan calculator.
Home Loan Affordability
This calculation is much easier to do than the previous two. The banks will consider no more than 30% of your monthly income as a home loan repayment.
If you receive a housing subsidy, the subsidy gets added to the 30% monthly income when applying for a home loan.
You can calculate how much home loan you can afford by using the PV calculation above, or you can use the RealFact affordability calculator. The Affordability Calculator will do all the necessary calculations for you.
Home Loan Calculations
We hope that Home Loan Calculations are somewhat clearer after reading this article. But even if it isn't, at least you now know about the easy-to-use RealFact calculators!
