Mortgage Calculator

Ukrainian financial system is starting to recover from the deep crisis. More and more banks declare their readiness to resume issuing loans to individuals. The first portent is mortgage lending which has been always perceived as one of the most reliable types of loans for people.

Having analyzed the causes of problems with mortgages originated in 2007-2009, the Project has come to a conclusion that partially those problems result from customers’ unawareness about loan terms at the stage of loan agreement execution. Our studies have shown that borrowers not always understood not only the legal consequences of entering into mortgage and loan agreements but also the financial aspect of that matter – how much, when, whom and for what they would have to pay.

Anticipating the period of increased availability of mortgage loans and aiming to protect the interests of banking services consumers, the Project has initiated a campaign for raising the financial literacy of the Ukrainian public. The first and the key component of this initiative is awareness-raising work regarding borrower’s right for information, which in international practice is called simply and aptly ‘truth in lending’.

The Project has designed and presents to the wide public a mortgage calculator based on compulsory Rules for Ukrainian Banks on Informing a Customer About Lending Terms and Total Loan Costs. Project specialists have tried hard to explain every component of calculator’s table.

In the future, the Project intends to supplement the calculator with a search (selection) option of loan terms which suit the customer most.

Borrower’s Right for Information

Every bank customer, every borrower has the right to receive comprehensive and true information from the bank on the cost of services he or she is using or intends to use. Since, from consumer’s standpoint, bank loan is a product, just like everything else: foodstuffs, medication or kid’s toys. A consumer has the right to know about qualities of products he or she consumes as well as consequences of this.

Borrower’s right for information is stipulated in several laws and regulations.

First of all, Law of Ukraine on Banks and Banking has article 56 “Customer’s Right for Information” which directly establishes that a bank is obliged to provide information regarding the cost of bank services on customer’s demand. Failure to fulfill this obligation is regarded as breach of banking legislation and may have grave consequences for the bank (provided that bank client knows his rights and uses them!).

Secondly, Law of Ukraine on Consumer Rights Protection has article 11 “Consumer Rights In Case of Installment Buying” which stipulates in detail what kind of information a consumer is entitled to obtain from the bank before contract execution (that is, at the stage of searching for a bank from which to raise a loan) and what kind of information the bank is obliged to indicate in the loan agreement at the moment of its execution. All this is aimed at preventing a consumer from buying a ‘pig in a poke’.

Finally, based on these two laws the National Bank of Ukraine developed as early as in 2007 and introduced Rules for Ukrainian Banks on Informing a Customer About Lending Terms and Total Loan Costs. These Rules not just detailed the requirements of Law of Ukraine on Consumer Rights Protection. They created unified ‘rules of play’ for all banks in individual lending market. These rules call for each bank to provide each client with standardized information in the form of a table indicating each and every direct and accompanying expense of a borrower under a loan. This enables comparison of lending terms offered by different banks and selection of those most suitable for a specific client.

Also, it is necessary to understand that these rules are a piece of banking legislation, so non-compliance or violation will result in a bank being accountable for this to the National Bank. Thus, the bank will have to deal not with one unhappy client but with a regulator entrusted with powers and having highly-qualified staff.

What Is Mortgage Calculator For?

Mortgage calculator is needed in several cases.

First of all, a prospective borrower may determine his cash flows, in other words, how much he will have to pay each month taking into account all direct and accompanying payments. This is called a schedule or calendar of payments. It is well known that even under annuity scheme the payments may vary – periodical insurance or other accompanying payments create ‘peak periods’ to which a borrower should be prepared.

Secondly, a calculator enables estimation of two loan parameters most important from consumer’s standpoint – cost of a loan in absolute terms and the real interest rate. The cost of a loan in absolute terms refers to the amount a borrower is paying in excess for an apartment when raising a loan. It is calculated by deducting principal amount from total payments made by the borrower during the term of the loan. Quite often the amount paid in excess may be several times larger than the borrowed amount. The problem when calculating costs in absolute terms is that they do not take into account the inflation and just add up money paid today and that paid years from now. It is the cost of a loan in real terms that takes into account the time value of money since it is calculated as internal rate of return under a mortgage and takes into account not only the interest rate and size of other fees but also how quickly the mortgage itself (principal amount) is repaid.

Moreover, since the calculator is standardized the prospective borrower can calculate the loan terms offered by several banks (in order to do so it is necessary to enter data on every loan option and then print out the results obtained) for their further comparison.

How Does Mortgage Calculator Work?

The calculator is based on built-in functions of MS Excel. You need to download the file to your computer and then you can work with it off-line. User should enter parameters of his loan into top cells of the sheet after which the schedule of payments, cost of a loan and real interest rate will be calculated automatically.

To ensure proper work of calculator parameters, it is necessary to install an add-in “Analysis ToolPak”. Otherwise, the real interest rate on the loan will not be calculated.

Can Mortgage Calculator Data Be Regarded As A Reference?

The mortgage calculator is based on the following important assumptions:

1. Interest rate is calculated on ‘actual/actual’ basis, that is, based on the actual number of days in a month and year. Although this method is the most common for the Ukrainian banks, other types of basis may be used as well. This influences the interest charges and as a result the cost of a loan.
2. The schedule of payments is broken down by months, however to make it more illustrative the payment is indicated as due on the last day of the respective month. In fact, banks may establish other terms of payment and that impacts the real interest rate which is very sensitive to the specific timing of the payment.

There also may be some other deviations of assumptions, on which the calculator is based, from reality. Therefore, we suggest using the calculation results only as a reference. You need to remember that the official calculations should be made and provided to you by the bank itself.

What Can Mortgage Calculator Not Do?

There are some functions that cannot be performed by the mortgage calculator.

First of all, the calculator does not support the so-called ‘floating’ interest rate on a loan, that is, a situation when different interest rates for using borrowed funds are applied at different periods. The calculator is based on the assumption that interest rate on a loan is set once during the execution of agreement and is not subject to changing. If such change does take place, it is better to make a new calculation starting from the date when new interest rate was applied.

Secondly, this also concerns other parameters of loan costs, such as insurance payments. It is known that banks quite often change the list of insurance companies accredited for mortgage insurance, and even within one company the size of an insurance payment may change as time goes by. The mortgage calculator is based on the assumption that accompanying tariffs do not change throughout the term of a loan.

Thirdly, the calculator is a single-currency one, that is, it calculates all payments and rates only in one currency – hryvnya. In the next versions we will enable the calculation of payments schedule in other currencies. The main difficulty in this case will be the fact that the Ukrainian legislation provides for all fees to be charged in the local currency only, therefore, under a FX-denominated loan the principal amount and interest will be paid in foreign currency, while insurance and other payments will be made in hryvnya.