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AER Equation:
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The Home Loan Effective Interest Rate After Tax Rebate calculates the true annual cost of a home loan after accounting for tax benefits. It provides a more accurate assessment of borrowing costs by incorporating tax deductions on mortgage interest payments.
The calculator uses the AER equation:
Where:
Explanation: The equation accounts for the compounding effect and tax benefits on home loan interest payments, providing the true effective interest rate after tax deductions.
Details: Accurate AER calculation is crucial for comparing different loan options, understanding the true cost of borrowing, and making informed financial decisions regarding home financing.
Tips: Enter annual interest rate as decimal (e.g., 0.05 for 5%), compounding frequency per year, and tax rate as decimal. All values must be valid (interest rate > 0, compounding frequency ≥ 1, tax rate between 0-1).
Q1: Why calculate effective interest rate after tax rebate?
A: It provides the true cost of borrowing by accounting for tax deductions on mortgage interest, allowing for better comparison between loan products.
Q2: How does compounding frequency affect the result?
A: Higher compounding frequencies result in higher effective rates due to more frequent application of interest.
Q3: What tax rate should I use?
A: Use your marginal tax rate that applies to mortgage interest deductions in your jurisdiction.
Q4: Are there limitations to this calculation?
A: This calculation assumes constant interest rates and tax benefits throughout the loan term and may not account for all tax regulations.
Q5: Can this be used for other types of loans?
A: While designed for home loans, the formula can be applied to any loan with tax-deductible interest, though specific tax rules may vary.