Home Loan Affordability Calculator: Understanding Your Mortgage Capacity

What is a Home Loan Affordability Calculator?

A home loan affordability calculator is a financial tool that helps potential homebuyers estimate how much they can borrow based on their income, expenses, and loan terms. It takes into account factors such as monthly income, other sources of income, monthly expenditures, interest rates, and loan duration to provide an estimate of the maximum affordable loan amount.

The Home Loan Affordability Formula

The formula used to calculate the maximum affordable home loan is:

\[L = P\frac{1-(1+r)^{-n}}{r}\]

Where:

• \(L\) = Maximum affordable loan amount
• \(P\) = Maximum monthly payment
• \(r\) = Monthly interest rate (annual rate divided by 12)
• \(n\) = Total number of monthly payments (years × 12)

Step-by-Step Calculation Process

1. Calculate total monthly income by adding regular income and other income sources.
2. Determine the maximum monthly payment, typically 28% of disposable income (total income minus expenses).
3. Calculate the monthly interest rate by dividing the annual rate by 12.
4. Apply the formula to calculate the maximum affordable loan amount.
5. Calculate total interest by subtracting the loan amount from the total payments over the loan term.

Example Calculation

Let's calculate the maximum affordable home loan for someone with the following financial details:

• Monthly Income: $5,000
• Other Income: $1,000
• Monthly Expenditure: $2,500
• Interest Rate: 4% per year
• Loan Term: 30 years

1. Total Monthly Income = $5,000 + $1,000 = $6,000
2. Maximum Monthly Payment = ($6,000 - $2,500) × 0.28 = $980
3. Monthly Interest Rate = 4% ÷ 12 = 0.3333%
4. \(L = 980 \times \frac{1-(1+0.003333)^{-(30 \times 12)}}{0.003333} = 205,397.92\)
5. Total Interest = ($980 × 30 × 12) - $205,397.92 = $147,202.08

Visual Representation

The green portion represents the principal ($205,397.92), while the red portion shows the total interest ($147,202.08) over the life of the home loan.