Use this calculator to determine how much you could borrow for your mortgage. Intended as a guide only, other costs will likely be involved.
Note that since the financial crisis most mortgage providers require a minimum 10% deposit. For the most competitive rates a deposit of 20% is usually required, making it extremely difficult for first home buyers to access the best mortgage rates.
1. annual pre-tax salary
2. monthly payments on car loans, personal loans and credit card debt.
* Given a min 10% deposit your max mortgage offer will likely be xxx.
Joe and Anne Anderson have been saving hard for a deposit, and they want to know how much house they can afford. Using the simple mortgage calculator on this page they sit down to work it out.
Anne has a pre-tax annual salary of $40,000. Joe’s is $32,000. Anne types these numbers into the Your salary p.a. and Partners salary p.a. fields. Together, and with a little help from Joe’s parents, they have managed to save $36,000 toward a deposit. Anne types $36,000 into the Your deposit field.
The Andersons paid off their credit card debt before they started saving their deposit, but they do have a car loan that requires payments of $500 per month. They don’t have any other personal loans. Anne enters $500 in the Other monthly costs field. General budget expenditures (rent, food, utility bills and entertainment) do not count as other monthly costs, only credit payments.
With all the data entered, Anne hits the Calculate button and they go over the results together.
The mortgage calculator suggests they can afford a mortgage between $198,000 to $277,200. This range is an indication of what banks are likely to offer them as a mortgage. Since banks have different lending requirements, and different underlying rules of how much they will lend it is impossible to give an exact figure.
The general formula is three to four times the combined incomes, after deducting any net costs from other loans. In the case of the Andersons, this net figure is $66,000.
The chart shows the upper and lower ranges of the likely mortgage the Andersons could secure. It also shows the average house price in the US (or the UK or Australia). Regional house price differences are particularly large in the United States, hence the average price country-wide is intended only as the roughest of guides.
The size of your deposit in relation to the house cost has a big effect on what kind of deal you can get. A useful metric for measuring the deposit in relation to purchase price is the loan-to-value ratio (LTV). A 10% deposit equates to an LTV of 90%. The lower the LTV ratio the better. An LTV of 75% or lower will usually qualify for the best interest rate available. From 75% to 90% the interest rate offered by the bank will increase. An LTV of more than 90% will not qualify for a normal mortgage, but will some form of mortgage insurance.
The Federal Housing Administration (FHA) is one source of mortgage insurance. The federal government offers lenders insurance on borrowers who qualify for an FHA secured loan (the money still comes from the lending institution). These loans come with both upfront (currently 1.75% of base loan) and continuing mortgage insurance premiums (MIPs). The annual premiums are laid out in the tables below. The rate depends on three factors: the term of the loan, the size of the loan and the size of the LTV. If you qualify for an FHA secured loan it is possible to obtain a mortgage with an LTV of up to 97% (a 3% deposit).
|Base Loan Amount||LTV||Annual MIP|
|<= $625,500||> 95.00%||1.35%|
|> $625,500||<= 95.00%||1.5%|
|> $625,500||> 95.00%||1.55%|
|Base Loan Amount||LTV||Annual MIP|
|<= $625,500||<= 90.00%||0.45%|
|<= $625,500||> 90.00%||0.70%|
|> $625,500||<= 90.00%||0.70%|
|> $625,500||> 90.00%||0.95%|
source: FHA Mortgage Requirements
If you do not qualify for an FHA secured loan, and have an LTV of over 80% (less than 20% deposit), then the bank will usually require private mortgage insurance (PMI) on your mortgage. This is the private sector equivalent of FHA secured loans. PMI adds a surcharge to the mortgage interest rate in the range of 0.3% to 1.5%. Avoiding mortgage insurance is one of the reasons that a larger deposit results in a cheaper mortgage. Banks are also incentivised to offer lower underlying interest rates if the LTV is low, as they are taking on less risk.