If you know even the smallest thing about home loans, you probably know there's an interest rate attached to them. This is what the lender charges you to borrow money from them.
When you make your mortgage repayments there are typically 2 parts to them: the principal and the interest. Each repayment goes towards paying back both the money you borrow (the principal) and the interest (charged by the lender).
Lenders calculate your interest charges daily or monthly, and it can surprise people to find out that the interest part of your repayments can add up to a huge chunk of money on top of your original loan amount.
In fact, if you borrowed $600,000 on a 30-year loan with an interest rate of 6.0%, you'd pay another $695,030 in interest on top of your loan amount. That's right – almost $1.3 million on your $600,000 loan.
Interest on your home loan is usually calculated daily and then charged to you at the end of each month. But, you'll notice that your interest rate is charged per annum. Your bank will take the outstanding loan amount at the end of each business day, multiply it by the interest rate that applies to your loan, then divide that amount by 365 days (or 366 in a leap year).
Assuming you have an outstanding loan amount of $600,000 and an interest rate of 6.00% p.a., your interest repayment for 1 day would be calculated using the following formula:
($600,000 x 0.06) ÷ 365 = $98.63
To work out the monthly interest charges, multiply the daily interest charge by the number of days in the month.
$98.63 x 30 = $2,958.90 monthly interest charge
At the end of the month, each daily interest charge is added together and then charged to your loan. To work out how much your interest repayments will be, input the details of your loan into our home loan interest calculator below.
If my loan principal reduces over time, why do my repayments stay the same?
As we've said already, there are 2 parts to the loan repayment: interest and principal. Lenders spread out the interest charges over time, charging more interest early on. This means you repay less of the principal and more interest.
As time goes on, you pay less in interest and pay off more of the principal. This is called an amortisation schedule.
Finder survey: Do Australians of different ages know the difference between a home loan interest rate and comparison rate?
Response
75+ yrs
65-74 yrs
55-64 yrs
45-54 yrs
35-44 yrs
25-34 yrs
18-24 yrs
Yes
51.16%
50.31%
67.25%
61.84%
64.17%
57.77%
55.71%
No
48.84%
49.69%
32.75%
38.16%
35.83%
42.23%
44.29%
Source: Finder survey by Pure Profile of 1112 Australians, December 2023
What factors affect the amount of interest you pay?
Reserve Bank cash rate. Home loan interest rates are generally based on the official cash rate set by the Reserve Bank of Australia 8 times a year.
Home loan interest rate. Although partly determined by the RBA, you'll notice banks charge a higher rate and that's because they set their own rates for thier own reasons.
The amount you borrow. Not always, but if you borrow a high amount or a high LVR you might end up with a higher interest rate.
The outstanding loan amount. As you gradually pay off the money you borrow, you'll pay interest on a smaller loan amount and your interest payments will slowly reduce. The interest when you first start paying off a $600,000 loan will be much more than when you've paid off half the loan.
The number of days in the month. Because most lenders calculate interest on home loans daily and then charge that interest to you each month, you could pay a smaller amount of interest in February (with 28 days in the month) than you do in March (with 31 days).
Loan term. Paying your loan off over a shorter period will mean your monthly repayments will be much higher, but you'll pay off the loan faster and pay much less in interest!
Repayment frequency. Most lenders allow you to make repayments weekly, fortnightly or monthly. The more frequently you make repayments, the less interest you will pay. Use our bi-monthly calculator to see how your interest payments will vary depending on your repayment frequency.
Offset accounts. Any money in your offset account will be taken off the loan value your lender is charging interest against. If you have a $600,000 loan but you have $100,000 saved in your offset, the lender will only charge interest on $500,000. Your repayments will stay the same, but because you're paying less interest you're making more repayments towards your loan principal. That means you could pay off the loan faster.
Principal and interest vs interest-only
Ok so remember when we said your mortgage repayments will pay off a bit of the principal loan amount and a bit of the interest... that's not always the case. Although principal and interest repayments are the most common way to pay off a home loan, you could choose an interest-only home loan instead. This is where you only repay the interest and, yes, not pay down the loan.
Interest only loans are designed to allow you to make interest-only repayments for a certain period, for example if you're building a new home or if you're a property investor with an investment mortgage. This allows you to reduce your regular repayment amount.
If you're struggling to repay your home loan, your lender may be able to move you onto an interest only loan for a short period. Your repayments will reduce and give you a bit of breathing space, but remember that you are not reducing your loan amount. This means that when you begin repaying principal and interest again you may have even higher repayments so that you can still repay in the loan term.
In our hypothetical example, Susie is borrowing $700,000 to buy a house. Like most borrowers, she wants to save as much money on interest repayments as she possibly can. After comparing home loans with 100% offset accounts, Susie decides to calculate just how much a 0.25% p.a. difference in interest rates could make to the total cost of a loan.
If she can find a loan with an interest rate of 6% p.a. on a 30-year loan term, her monthly principal and interest repayments will be $4,197. The total interest she will end up paying over the life of the loan is $810,867.
But if Susie finds a loan with a marginally lower interest rate of 5.75% p.a., her monthly repayments will be $4,085 – a saving of $112 per month. The total interest over the life of the loan will be $770,603. That's a total interest saving of around $40,000.
* This is a fictional, but realistic, example.
How to save interest on your home loan
Now that you know a bit more about how interest is calculated, let's look at the ways you can pay less of it.
Look for an offset account.Home loans with offset accounts allow you to reduce the principal amount that you need to pay interest on by "offsetting" the loan principal with your savings. It's a powerful and free way to super-charge your mortgage repayments.
Make frequent repayments. The more frequently you make regular loan repayments, the less interest you will have to pay as interest is calculated daily. Even paying weekly or fortnightly instead of a monthly can help you make headway.
Make extra repayments. The ability to make extra repayments without penalty can work strongly in your favour. Extra repayments off the principal loan amount now mean less interest you pay over the life of the loan.
Choose a shorter loan term. The longer you take to pay off your loan, the more interest you will end up paying. Remember, banks calculate interest on your loan amount daily. Choosing a 25- instead of a 30-year loan term can make a big difference to the amount of interest you pay overall.
Frequently asked questions about how interest is calculated on a home loan
The answer to this question can change, as banks and lenders will change their interest rates depending on some of the factors mentioned above.
At the moment, fixed interest rates are slightly better than variable interest rates. But this would mean you're locked into that rate for a set period, and if rates drop over that time you won't benefit from lower rates. At the same time, if rates increase you would be locked into a better rate. The lowest fixed rate on the market right now is 4.99%.
The lowest variable rate on the market right now is 5.38%.
The total interest payable on a 30-year $500,000 home loan would be $579,191 - assuming the interest rate never changed from 6% (which is very unlikely).
The initial monthly interest charge would be around $2,465.75, but this would decrease over time.
You could work this out with the following formula:
(Remaining loan value (minus any offset) x interest rate) ÷ days in year = daily interest charge
As an authority on all things personal finance, Sarah Megginson is passionate about helping you save money and make money. She is an editor and money expert with 20 years’ experience and an extensive background in property and finance journalism. Sarah holds ASIC RG146-compliant Tier 1 Generic Knowledge certification, and she's a regular media commentator, appearing weekly on TV (Sunrise, Channel 7 news, Nine news), radio (KIIS FM, Triple M, 3AW, 2GB, 6PR) and in digital and print media. See full bio
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I NEED TO CALCULATE HOW MUCH MY INTEREST CHARGED AMOUNT PER MONTH IS . WHAT INFORMATION DO I NEED TO DO THIS AND HOW DO I DO IT?
Finder
RichardFebruary 27, 2023Finder
Hi Shelley,
If you already have a home loan you should be able to see the breakdown of interest versus principal on your monthly repayments each month. If you want to do a basic calculation for yourself do the following:
1. Take your interest rate and convert it into a a decimal figure by dividing it by 100. So a rate of 5.00% would become 0.05.
2. Divide this number by 12 to get a monthly figure. In this case, 0.05 divided by 12 equals 0.004166667.
3. You multiply this figure by your loan principal (how much you have left to repay on your loan). If your loan principal is $500,000 then 500,000 times 0.004166667 equals $2,083.33. That’s your monthly interest charge.
Keep in mind this is a simple calculation and doesn’t take into account your loan term, your loan type, loan fees or rate changes.
I hope this helps.
Richard
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Assuming you have an outstanding loan amount of $600,000 and an interest rate of 6.00% p.a., your interest repayment for 1 day would be calculated using the following formula:
I NEED TO CALCULATE HOW MUCH MY INTEREST CHARGED AMOUNT PER MONTH IS . WHAT INFORMATION DO I NEED TO DO THIS AND HOW DO I DO IT?
Hi Shelley,
If you already have a home loan you should be able to see the breakdown of interest versus principal on your monthly repayments each month. If you want to do a basic calculation for yourself do the following:
1. Take your interest rate and convert it into a a decimal figure by dividing it by 100. So a rate of 5.00% would become 0.05.
2. Divide this number by 12 to get a monthly figure. In this case, 0.05 divided by 12 equals 0.004166667.
3. You multiply this figure by your loan principal (how much you have left to repay on your loan). If your loan principal is $500,000 then 500,000 times 0.004166667 equals $2,083.33. That’s your monthly interest charge.
Keep in mind this is a simple calculation and doesn’t take into account your loan term, your loan type, loan fees or rate changes.
I hope this helps.
Richard