A friend in Australia recently sought my advice about the usefulness or otherwise of a loan calculator. My friend was looking at refinancing her mortgage in Australia but was unsure as to the long-term benefits of such a move. She had heard about a loan calculator that could compare products and wanted to run her own scenario. We tracked down one loan calculator but this was a simple “how much can I borrow?" loan calculator which required you to input your salary and other liabilities or debts to work out your borrowing capacity. The fact is that while such a loan calculator will give you an idea of how much you might borrow in Australia, other factors will be taken into account by the lender when assessing your loan.

Unfortunately a simple loan calculator has limited fields. In Australia, a lender will not just look at your debts and income but also the number dependants you have relying on that income, the time you have been in your current employment and enjoying the income, your savings history, and particularly your credit history. Although a loan calculator may have indicated a borrowing capacity of say $250,000 it is unlikely any lender in standard mortgages will advance funds if you have a poor credit history. One or possibly two explainable and minor defaults may not impact on the approval process but a number of defaults or judgements, or a single default on a large loan will definitely go against you. It is important that before you proceed with any refinance or purchase that you do speak with a lender or mortgage manager to check the parameters and whether you are in the ballpark for the loan amount you are after. There is a risk in relying on a simple loan calculator and expecting that a loan for this amount will be automatically approved.

While the simple loan calculator was not much use for my friend’s purposes we did find a loan calculator that compared the interest rates of her existing lender with another lender she was considering refinancing with. Again though, this loan calculator was strictly considering the impact of interest rates over varying terms. My friend was comparing her existing mortgage manager loan with that of one of the big four banks. The bank had quoted her a monthly instalment which was lower than that being sought under her existing facility and this was confirmed when she compared the interest rates through the loan calculator. The interest rate was marginally lower than the mortgage manager’s rate. However when she looked at the fine print in the product details on the bank’s website she found that on top of the interest rate the bank was also going to seek a monthly fee of $8. She would also be paying for transaction fees on her account. When she added up the fees and the monthly instalment figure, the total monthly repayment was greater with the bank’s loan. So, while the loan calculator had indicated that she would be better off refinancing, the reality was that this was not going to be the case at all. She also realised that the bank’s monthly mortgage payment had been calculated over a 30-year term while her existing loan was arranged on a 25-year period. Obviously you will be paying a greater amount per month on a $250,000 loan if you choose to repay it over a shorter term. The loan calculator was able to quickly show the difference in the monthly figures over the different loan terms. Had my friend decided to proceed with the refinance and pay an application fee she would have been worse off financially once the refinance has been finalised.

Furthermore, the loan calculator did not factor in some important benefits she was enjoying, particularly a 100% offset loan feature which enabled her to reduce her monthly instalment significantly. By all means use a loan calculator as a guide but before committing to any fees or paying a deposit on a new purchase, check with a mortgage manager or other lender to make sure you and your loan calculator are on the right track. Before refinancing it is always a good idea to speak with your existing lender. Unless there is some event that has annoyed you and you have made the decision to leave because of the poor relationship you have with your existing lender, then discuss any concerns you might have with your existing lender - they will be willing to run through any loan calculator figures you want clarified and will be generally keen to retain your business.

While my friend was looking for a loan calculator to help her with a refinance decision others want to use a loan calculator when they are trying to work out the maximum purchase price they can go to on a property they are keen to buy. Just as in a refinance scenario, a loan calculator can be handy but make sure you check with a mortgage manager or lender before you exchange contracts. Most lenders will provide you with an approval in principle that will give you added comfort at auction or when negotiating with a real estate agent or vendor.

In Australia, a loan calculator can be useful but do not rely on it solely when making finance decisions that will have a significant impact on your cash flow over 25 to 30 years.