My real estate project
I borrow
€
On
a
With an interest rate
%
An insurance rate
%
Amount of your loan
...
Your monthly payment
...
Total cost of credit
...
How to calculate a mortgage monthly payment?
In any real estate investment, understanding how the monthly payment of a mortgage is calculated is an essential prerequisite. The monthly payment determines cash flow, influences the total cost of the loan, and conditions an investor's ability to grow their wealth.
Our loan simulation tool allows you to get an idea of the budget you can borrow for your next real estate investment.
Understanding the calculation of a mortgage monthly payment
How the calculation of a monthly payment works
The calculation of a loan's monthly payment is based on the principle of amortizable loans, the most common format in real estate loans. In this model, each monthly payment includes a portion of interest and a portion of principal. The interest decreases over time, while the portion of principal gradually increases.
Thus:
Loan monthly payment = C ×1 / [1-(1+T)^(−N)]
With:
C the amount borrowed,
T the monthly interest rate, obtained by dividing the annual rate by 12,
N the repayment term expressed in total number of monthly payments.
How the borrowed amount directly influences the monthly payment
The borrowed amount forms the basis for calculating loan monthly payments. The more the investor borrows, the higher the monthly payment, all else being equal. This parameter directly depends on the personal contribution, which mechanically reduces the loan amount. However, a higher contribution does not always mean a better strategy. While it reduces the monthly payments, it also decreases the financial leverage that often strengthens rental investment.
By reducing the capital financed by the bank, the investor allocates more equity to the operation, lowering the profitability of those funds. Conversely, a low contribution increases the loan amount, raising the monthly payment but improving the return on invested capital if the rents cover a substantial part of the financing. Therefore, the trade-off depends on the objective: maximizing cash-flow or maximizing return on investment.
How the rate modifies the total cost and the level of monthly payments
The loan rate has a decisive effect on the total cost of credit and the amount of monthly payments. In France, the fixed rate offers reassuring visibility in the long term: the monthly payment remains stable over the entire duration of the real estate loan.
In any case, even a minimal variation in the nominal rate can change the total cost of credit over several decades. When calculating his monthly payment, the investor must also integrate the insurance rate, which is often mandatory. This insurance rate adds a significant amount to each repayment, increasing the final monthly payment.
The loan rate depends on numerous parameters: borrower profile, loan amount, repayment duration, or even the nature of the financed property. Effective negotiation can significantly reduce the total cost of the operation.
Why the loan duration changes the monthly payment and the cost of the loan
A long repayment period allows for lower monthly payments, thus facilitating the achievement of positive cash-flow when the rent covers a significant part of the financing. However, this strategy increases the total cost of credit, as the borrowing interest accumulates over a longer period.
Conversely, a short duration involves higher monthly payments but significantly reduces the overall cost. The investor must therefore choose between immediate profitability and long-term profitability.
For example, an investor looking to maximize borrowing capacity to multiply operations will tend to favor a longer duration. An investor wishing to alleviate financial pressure on retirement will prefer a shorter duration to quickly repay the capital.
The mistakes to avoid when calculating a loan monthly payment
Underrating the impact of the insurance rate in the overall budget
Borrower's insurance often represents an underestimated item in the loan simulation. However, depending on the borrower's profile, it can represent a substantial part of the monthly payment. The impact is even more visible on long-term loans, as the cost accumulates over several decades. Insurance is an integral part of the real estate loan and must be included in any calculation of monthly payments.
Furthermore, insurance can vary based on the amount of the loan, the age of the investor, or their health status. Negotiating or delegating insurance can reduce this cost, thereby improving the overall profitability of the operation.
Neglecting the influence of guarantee and file fees
Guarantee fees and file fees indirectly increase the amount of credit by adding to the overall financing cost. Notary fees, although not included in the monthly payment, influence available cash flow and can push the investor to adjust their contribution.
By ignoring these fees, the investor may misjudge their actual capacity to finance a project. This is why any serious loan simulator includes file fees, guarantee fees, and sometimes insurance fees to provide a complete picture of the budget.
Confusing managed monthly payments with profitability
A low monthly payment does not guarantee the profitability of an investment. A long duration, chosen to reduce monthly payments, can significantly increase the total credit cost, diminishing the financial margin once the property is sold or fully amortized.
Conversely, a monthly payment that is too high can weaken the investor's cash flow, especially in the case of rental vacancy. It is therefore essential to align the calculation of monthly payments with potential rental income and expected yield. The success of the operation relies on the balance between financing cost, expected rent, and wealth strategy.
What to remember
The calculation of the monthly payments of a mortgage loan is much more than a mathematical exercise: it is a strategic tool to guide real estate purchasing decisions, structure financing, and optimize the profitability of one’s assets. The borrowed amount, the loan rate, and the repayment duration form a determining triptych whose interactions influence cash flow, the total cost of credit, and future borrowing capacity.
