Mortgage Affordability Calculator

The comparison most people make is the wrong one

Whether buying beats renting is mostly a question of how long you stay. This compares the two on their full cost year by year, so the answer comes out as a break-even point rather than a verdict.

Rent against the mortgage payment is not the comparison. Owning carries costs the payment does not include, and together they are rarely small:

• Property tax, which in some places approaches the mortgage interest.
• Insurance, generally more than a renter's policy.
• Maintenance — the roof, the boiler, the appliances. A common planning figure is around 1% of the home's value a year, averaged over the long run. It arrives unevenly, which is why it feels like nothing for three years and then a great deal at once.
• Closing costs, at both ends. These are what make a short stay expensive almost regardless of what the market does — you pay them twice and amortise them over however few years you were there.

What the down payment would otherwise have done

A deposit is money that stops being invested. Comparing a buyer against a renter who spends the difference flatters buying; comparing against a renter who invests it is the honest version, and it moves the break-even year meaningfully. What that money would have earned is the compound interest calculator's question.

What no calculator settles

Two things sit outside the arithmetic and often outrank it. Owning fixes most of your housing cost against rent that historically rises, which is worth a great deal over decades — and it converts a month's notice into a sale that takes months, which is worth rather less if your work might move. The figures above can tell you the financial break-even. They cannot tell you how likely you are to still want to live there.

If you do buy, the mortgage affordability calculator works out how much you could borrow, and the amortization schedule shows where the payments actually go — and how much of the early years is interest.

How to read the result

Compounding is what happens when the interest your money earns starts earning interest of its own. Put a balance in, add to it every month, and this works out what it becomes — and, more usefully, how much of that total you put there yourself and how much the growth did.

The number most people look at first is the ending balance. The one worth looking at is the split beneath it: total contributions against growth. Early on, almost everything in the balance is money you deposited. The point at which growth overtakes contributions is the moment compounding starts doing the work for you, and how soon it arrives depends far more on time than on the rate.

That is the counter-intuitive part. Chasing a slightly higher return moves the outcome much less than starting earlier does, because a contribution made in year one has every remaining year to compound, while one made in the final year has none. It is also why the years you leave the balance alone matter as much as the years you are adding to it.

What this calculator assumes

Interest is compounded monthly at the annual rate you enter, and contributions land at the end of each month — so a month's deposit earns nothing in the month it is made. That is the conservative convention, and the same one the retirement projections use, so the figures here and elsewhere in the application describe the same arithmetic.

The rate you type is a nominal rate, not a real one. Nothing here is deducted for inflation, tax or fund fees, so the ending balance is in future dollars rather than today's. Over a few years that distinction is small; over thirty it is most of the answer. Two other tools cover the pieces this one leaves out:

• Inflation impact — what a future sum is worth in today's money, which is the honest way to read a long projection.
• Retirement planning — the same compounding run in real terms and against randomly drawn returns, rather than one smooth rate every year.

A steady rate every year is also a simplification. Real returns arrive unevenly, and the order they arrive in changes the outcome once you start withdrawing — which is exactly what a single average rate cannot show you.

How many months you actually need

An emergency fund is the money that stops a bad month becoming a debt. This works out how big yours should be from your own essential spending, how far along you already are, and how long the rest will take at the amount you can save each month.

Three to six months of essential expenses is the usual advice, and the range matters more than the midpoint. Lean toward three if your income is salaried and stable, your household has a second earner, and your job would be straightforward to replace. Lean toward six or more if you are self-employed, paid on commission, the only earner, or working somewhere a job search would take months.

If the full figure looks impossible, it usually is — at first. A common approach is to bank a smaller starter amount, around $1,000, before anything else. That is enough to absorb most car repairs and medical copays without reaching for a credit card, which is the specific outcome an emergency fund exists to prevent.

Essential expenses, not all expenses

The figure to base this on is what you would still be paying in a month with no income: housing, utilities, groceries, transport, insurance, and the minimum payments on any debt. Not dining out, not subscriptions, not holidays. Sizing the fund against your whole budget produces a target so large that most people give up on it, and it is answering the wrong question — you would cut the discretionary spending in the month you needed this.

Where to keep it

Somewhere you can reach in a day or two and where the balance does not move: a savings account, not an investment account. Money you might need at short notice is the one place the growth in the compound interest calculator is the wrong goal — a fund that fell 20% the month you were made redundant would have failed at its only job.

What goes in each bucket

The 50/30/20 rule is the simplest budget worth using: half your take-home pay to needs, 30% to wants, 20% to savings and debt payoff. The useful part is usually the gap between the split and what you actually spend.

• Needs (50%) — housing, utilities, groceries, transport, insurance, childcare, and the minimum payment on every debt. The test is whether skipping it has a consequence beyond disappointment.
• Wants (30%) — eating out, streaming, hobbies, travel, the upgrade rather than the replacement. Most of the discretion in a budget lives here, which is why it is the bucket worth measuring rather than guessing at.
• Savings and debt payoff (20%) — the emergency fund, retirement contributions, and anything paid toward a debt above its minimum. Extra principal counts here, not in needs: it is a choice, and it builds net worth the same way saving does.

It is a starting point, not a rule

Half of take-home to needs assumes housing costs a normal share of income, which is not true everywhere. In an expensive city, rent alone can take 40% and the split is unreachable without a flatmate or a move — neither of which a budget rule can decide for you. The response is not to abandon the framework but to read it as a diagnosis: if needs are at 65%, that is the number to work on, and no amount of trimming the wants bucket substitutes.

The reverse case matters too. If your needs come in well under half, the rule is quietly giving you permission to spend 30% on wants — and the 20% floor for savings is a floor, not a target.

Percentages of take-home, not gross

Every figure here is a share of what actually reaches your account. Budgeting off gross pay counts money that was never yours to allocate: tax, national insurance or FICA, pension or 401(k) deferrals and insurance premiums have all gone before payday. That is also why the pension contributions taken from your payslip sit outside this split rather than inside the 20% — you never saw them.

A budget built around your real pay dates rather than a monthly average is what the cash flow planner does with an account; this is the version that needs nothing.

The two directions, and which one you want

Inflation is the reason a number in the future is not worth what it looks like. This works the effect out in both directions: what something costing a given amount today will cost later, and what a future sum is actually worth in today's money.

Future cost answers "what will this cost me later" — useful for an expense you know is coming: a child starting university, a roof that will need replacing, the car after this one.

Today's money answers the more uncomfortable question: a projection that ends at some large figure decades out is quoted in future dollars, and this converts it back into money you can reason about. It is the single most useful correction to apply to any long-range number, including the ones this application produces.

The third figure — purchasing power lost — is the same fact as a percentage. At 3% a year, money loses about a quarter of its value over a decade and roughly half over 25 years, which is a more legible way of saying the same thing than either of the amounts above.

Why this matters for savings and retirement

A savings projection that grows at 7% a year while inflation runs at 3% is not growing at 7% in any sense you can spend. The compound interest calculator deliberately works in nominal terms — it uses the rate you give it and does not deduct anything — so running its ending balance through this calculator is what turns it into a figure you can compare with today's prices.

The retirement projections take the other approach and run entirely in today's dollars, deflating the return before anything compounds. That is why the balances there look lower than a nominal calculator would suggest, and why they are the ones to trust over thirty years.

About the rate you enter

The calculation applies whatever annual rate you give it, evenly, for the whole period. Real inflation does not behave that way — it clusters, and the items in your own budget do not move together, with housing, healthcare and tuition historically outpacing the headline figure. A long-run average is a reasonable planning assumption and a poor forecast of any particular year.