Life Stages > Today's dollars

Today's dollars

Roy and Clare are just about to sign up for a mortgage with their bank. Over the weekend they use the quick mortgage calculator on Sorted to check their repayment figures.

It tells them that in borrowing $182,000 for 15 years at an interest rate of 8.15% and monthly repayments of $1,756 they will pay back $272,994 over the term of the loan.

That doesn’t sound right, thought Roy. Didn’t the bank’s website tell us it was more like $315,000? Clare checks back and sure enough, the amount the bank’s calculator had quoted was $315,915.

Roy and Clare are confused, so they email Sorted to ask what the story is.

Sorted reply that the reason our calculations can vary from your bank's is because we show results in today's dollars.

Today's dollars means that any amount you pay or receive in the future will have the same buying power as that same amount of dollars today.

Using today’s dollars, our calculator shows the total cost of the fifteen-year loan as $272,994 – because we estimate (at an inflation rate of 2% each year) that $315,915 nominal dollars paid over the 15 year period would only have the purchasing power of $272.994 today.

Roy and Clare reckon they now have a better idea of how much their loan will actually cost – and they are happy to go ahead with the mortgage.

 

Glossary: interest
Money paid in return for the use of money. If the bank is using your money (in a savings account) they pay you interest. If you are using the bank's money (via a loan), you pay the bank money.
Glossary: today's dollars
'Today's dollars' means that any amount you pay or receive in the future will have the same buying power as this many dollars today. For example, if you buy something worth $1000 now, in 10 years time, you would need $1220 ("nominal dollars") to buy that same thing (assuming 2% inflation). The $1220 nominal dollars in 10 years time is equivalent to $1000 today’s dollars. This means that the actual dollar amounts that you pay or receive are likely to be more than the figure quoted here, but it will have the same current buying power.
Glossary: inflation
Inflation - is the rate at which the prices of goods and services increase over time. The effect of this is to reduce the purchasing power of money. For example, if you could buy something with $1000 now, in one years time, you would need $1020 to buy that same thing (assuming 2% inflation).