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How to calculate home loan minimum repayments (before taking out the loan).

For example, with a credit card, they clearly state, that you need to make X amount as minimum repayment (maybe 10%) with Y% interest rate applied on balances after the interest free period.

However with home loans they don't mention a minimum repayment threshold for loans before they consider you a risk to defaulting or repossessing your home. When I'm looking around for loans, they mention the loan period (usually 30 years) the variable interest rate (3-5%) and the LVR% ratio (usually 80%) needed to start the loan, but why don't they mention the minimum repayments as with credit cards do?

Would the minimum repayment be the amount required to pay it off in 30 years? and what happens if I'm just below that limit? Do they send me a warning for repossession?

What if I make a lot of additional repayments but made zero repayments the next month, are the additional repayments of previous months taken into consideration as a safely net into future months?

Now obviously I would never pay the minimum amount as I would want to pay it off as fast as possible and I have always paid the amount due on my credit card. I have a 800+ credit score on my credit card and looking to get my first home loan, but I need to understand how home loans work and plan for when disaster strikes, then how would I know what the minimum amount I own before getting into trouble is.

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    Note that many mortgage agreements have limits to when and how you can make extra payments. Often there is an annual "anniversary date" where you can make extra payments to pay down your principal, but you may not be able to make extra payments whenever you feel like it. This varies between financial institutions, so you would have to ask about how it's done at each one. – GentlePurpleRain Dec 4 '18 at 19:55
  • In home loans, there is no 'minimum' amount, there is only THE 'amount', for a normal 30 year fixed mortgage, that would be 360 fixed, equal, unchanging monthly payments. If you pay so much as $1 less than that amount, you will be considered in arrears and if you pay extra, it will typically go toward your principle and shorten the length of your loan, your next monthly payment would still be the same as ever. – Glen Yates Dec 4 '18 at 20:11
  • Commenting to highlight this important bit: @Brandon's questions stem from not understanding the difference between a fixed loan and a revolving line of credit. – studog Dec 4 '18 at 20:23
  • There are online tools that can help with this, eg mortgagecalculator.org – Dan Staley Dec 4 '18 at 21:46
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You mention (emphasis mine):

When I'm looking around for loans, they mention the loan period (usually 30 years) the variable interest rate (3-5%) and the LVR% ratio (usually 80%) needed to start the loan

If it it were fixed term and fixed interest rate, you could plug the numbers into any mortgage payment calculator and determine what you need to pay every month (ignoring things like taxes and insurance).

However, with a fixed term and varying rate, your monthly payment can change. If the interest rate goes up, but you're still going to pay off the loan in the same amount of time, you need to pay more to cover the higher interest. How much more depends on how much higher the rate is and how much you still owe.

Calculating what you'd pay per month if it were it a fixed-rate mortgage can give you a rough idea of what you'd pay, but that amount could change as your rate changes.

  • But do additional repayments rollover into the next month so the minimum repayment is less in future months? For example I am required to make $1000 per month (as an example based on interest rates and loan period.) I make a repayment of $3000, one month, so my next minimum repayment only has to be in the next 3 months? Also what happens if I make a repayment of $990? Do they call me up asking me why I am below minimum repayment? I don't see a concept of minimum repayment with home loans, I only see that term being used for credit cards. – Brandon Dec 4 '18 at 12:57
  • Whether additional payments are applied to future payments to reduce what's due next month, applied to reducing principal, or something else, will be dependent on the terms of your mortgage. – yoozer8 Dec 4 '18 at 14:02
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    @Brandon: Typically, no. Your mortgage payment is usually a fixed amount (though the amount may change if you have a variable rate). If you pay extra, that reduces the principle, so the loan is paid off quicker, but you still have to make that $1000 payment next month. – jamesqf Dec 4 '18 at 18:40
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Yoozer8 gave a sufficient answer and you should up vote it, I certainly did.

I think you are having difficulty in understanding his answer is that home loans and credit cards are two very different types of loans. One is for a fixed loan, simple interest and the other is revolving credit.

With a credit card, you charge some stuff, pay your bill, and then next month charge some more stuff. If your bill is exactly the same as it was the month before, that is just coincidental and likely rare. Its revolving credit and a credit card account could last your whole life. The interest rate can change frequently and without bounds.

A home mortgage is very different. At the time of home purchase you sign a contract for a fixed amount for a fixed period of time. The interest rate may or may not be fixed, but even in the case of an ARM there are limits to when, how often, and how much the interest rate can change. There are many legal documents surrounding the creation of a mortgage and the key is that it is secured by the property being purchased. If you default on a mortgage, you will eventually lose your house.

With a fixed rate mortgage, your payments for the loan never change. Your escrow amounts may change, but that is a different topic. Even with an ARM the interest portion of your payment will change, but again it is for a fixed period of time until the next possible time it may change. You can prepay a mortgage payment which will allow you to skip the next payment but most people do not do this. Instead they pay extra to principle. The only effect of that is it shortens the loan.

A mortgage will always end, someday. Thirty years may seem like a long time, but it will end.

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    And in fact credit card companies have a powerful incentive to get you to make only the minimum payment each month, as they can then charge you interest - at high rates, too - on the remaining balance. – jamesqf Dec 4 '18 at 18:43
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Mortgage loans are normally for a specified amount, for a fixed period of time and a fixed interest rate. (Back to that point in a moment.) For example, you borrow $100,000 for 30 years at 4%. The bank then calculates how much you have to pay each month so that, allowing for interest, you will pay off the loan in the specified amount of time. The formula is a bit complicated, but there are plenty of "mortgage loan payment calculators" on the internet. For example, https://www.zillow.com/mortgage-calculator/

If you miss a payment or pay less than the required payment amount, the bank will contact you and request you to make up the payment. If you don't, sooner or later they'll be taking you to court to repossess your house.

With an installment loan like a mortgage, the bank normally doesn't talk about a "minimum payment amount" but simply about the "payment amount". The payment amount is the same for the entire life of the loan. At the beginning most of this goes to pay interest and only a small percentage goes to the principle. But as you gradually work down the principle, less and less goes to interest so that your last few payments are almost all principle.

If you pay more than the regular payment amount, the extra goes directly to principle. This reduces the amount of interest you pay the next month and all following months. You still have the same payment amount, but now more of it is going to principle. So if you make extra payments, you'll pay off the loan in less than the originally scheduled amount of time.

Some installment loans have a "pre-payment penalty". This means that if you make extra payments, you still pay some portion of the interest that you would have paid. Most, maybe all, mortgages in the US do not have pre-payment penalties these days.

Sometimes the interest rate is not fixed, but changes periodically. This is called an ARM, or "Adjustable Rate Mortgage". There will normally be specific dates when the rate can change, like after the first 5 years and every 2 years after that or some such. Of course when the interest rate changes than your payment amount will change.

Mortgage payments often include payments to an "escrow account". The bank keeps this account to pay your property taxes and home owners insurance. From the bank's point of view, they want to make sure that your property taxes are paid, because if you failed to pay taxes and the government repossessed your property, they no longer have any collateral for the loan. Basically, they take the total of your property taxes plus insurance for the year, divide by 12, and you have to pay that much each month. The real formula is more complicated because you have to build up enough in the escrow that there's always enough there when a bill comes in, but there are laws against them requiring you to have excessive surpluses.

  • "If you pay more than the regular payment amount...this reduces the amount of interest you pay the next month and all following months" - not necessarily. Sometimes interest is calculated based at the balance at the start of the year, or is calculated on some weird basis that I can't recall but was known as a "gross profile" calculation back in my day. If interest is calculated daily on the reducing balance on that day, then you're dead right. – markdwhite Dec 5 '18 at 2:50
  • @markdwhite I certainly don't claim to have studied the loan contract for every mortgage in America, so it's quite possible that some have different rules. I've had 5 mortgages in 2 states in my life, and for all of them interest was calculated based on the balance after the last payment. Not an average daily balance like a credit card, but balance after the last payment was applied. – Jay Dec 5 '18 at 16:22
  • my source: working in retail banking for 15 years, including time in the department that dealt with customer queries about the amount of interest charged on their mortgage, and manual recalculations of the same. Yes, there are different approaches to calculating interest, hence my first comment. – markdwhite Dec 6 '18 at 23:17
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From a comment;

But do additional repayments rollover into the next month so the minimum repayment is less in future months? For example I am required to make $1000 per month (as an example based on interest rates and loan period.) I make a repayment of $3000, one month, so my next minimum repayment only has to be in the next 3 months? Also what happens if I make a repayment of $990? Do they call me up asking me why I am below minimum repayment? I don't see a concept of minimum repayment with home loans, I only see that term being used for credit cards

With a revolving loan like a credit card, the amount owed is constantly changing, every time you charge something the amount owed goes up. Credit cards don't have a fixed payoff period, therefore they can't calculate a exact amount you have to pay if you want the balance to be zero at the end of the agreed number of years. If they did this it would change the next day. The credit card companies define a minimum payment amount to at last minimally move you towards that goal.

On the other hand in the United States mortgages and car loans run for a specific number of years. Some have fixed interest rates others have variable rates, but even the variable rate loans only change based on a schedule and set of rules.

The loan company can calculate exactly the payments you have to make based on the loan rules by the end of the agreed period.

Also what happens if I make a repayment of $990? Do they call me up asking me why I am below minimum repayment?

The loan documents will dictate what they do. But if you don't make a full payment there will be penalties, and you move one step closer to default. They will give you the information how much more the next payment has to be to get you back on schedule.

For example I am required to make $1000 per month (as an example based on interest rates and loan period.) I make a repayment of $3000, one month, so my next minimum repayment only has to be in the next 3 months?

Extra payments are also addressed in the documents. Depending on the rules and the instructions you give them, it can be used to cover future payments; or it can be used to reduce the balance keeping your future payments the same but accelerating the payoff so the loan is effectively shorter.

  • In your last statement, can both not be true? There are loans with 100% offset or redraw facility that allow extra repayments to reduce the loan + allow you to redraw or cover future payments from the extra funds? – Brandon Dec 9 '18 at 2:53

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