How Is Interest Calculated On My Home Loan?

If you’re looking to apply for a home loan, know that your monthly repayments will typically consist of both the principal (the amount you borrowed) and interest.

For example, you take out a $600,000 home loan at a 3% interest rate. Your principal starts at $600,000 but you won’t pay 3% on that same amount every month because your balance usually decreases as you make repayments.

How Do I Calculate My Home Loan Interest?

Suppose your bank calculates your home loan interest daily and charges you at the end of each month. You can find the interest charged on your home loan using this formula:

(P X R) / T = I

  • P = Principal; the amount you owe on your mortgage
  • R = Interest rate; the percentage rate divided by 100
  • T = Amount of time in days; it’s 365 (366 in a leap year) if you are charged annually
  • I = Interest; the daily interest charge

Let’s say you borrow $600,000 in a home loan at an interest rate of 3% a year. Using the formula above, the interest you’d pay per day would be:

($600,000 X 0.03) / 365 = $49.31

Which Factors Influence How Much Mortgage Interest I Pay?

Even if your repayments remain the same, the interest you pay might fluctuate each month. This is because your interest rate is calculated on a daily basis but charged monthly; the more days in a month, the higher the interest charged.

Some lenders may calculate interest differently. For example, they may assume the same number of days in each month and use the average balance for that month to calculate the interest. Overall, this has a negligible effect on repayments.

Factors that affect your mortgage interest include:

  • Your mortgage interest rate: The higher your interest rate, the more interest you will pay.
  • The amount you borrow: Even though some banks offer discounted interest rates for larger loans, you usually end up paying more total interest on a bigger home loan.
  • The outstanding amount on the loan: Your interest repayments will slowly decrease as you gradually pay off the loan amount.
  • The loan term: The length of your home loan also influences the interest you’ll pay, since the interest is charged each year. The faster you pay off your mortgage, the less you’ll pay in total interest repayments.

What Interest Rates Are Available?

Banks don’t always advertise their lowest rates. To spare you the hassle of shopping around, we have listed the best interest rates from our panel of 30+ lenders.

Check out the latest home loan interest rates and special offers.

How Can I Save Interest On My Home Loan?

You can save thousands of dollars on your interest just by getting the best rate. If you already have a home loan, you might even want to consider refinancing with your current lender or a new lender that can offer you a better rate.

One of the most effective ways to save on home loan interest is by paying off your loan faster. Here are some tips to help you do that:

  • Consider an offset account: If you have an offset account, the loan balance you pay interest on is reduced by the amount in the offset. For example, $50,000 in an offset account for a $500,000 mortgage means that you will only pay interest on $450,000.
  • Make extra repayments: Your extra repayments will go more towards paying off the principal portion of your loan, which means the interest charged on the outstanding balance will go down. Some lenders may have restrictions on how much extra you can pay and charge a fee for making extra repayments.
  • Make lump sum payments: Your lender may accept a lump sum payment if you’ve received a tax return, inheritance, bonus or dividend payments. The payment you make will go directly towards paying off the principal portion of your loan.
  • Pay both principal and interest: You’ll end up paying less in interest over time by hitting both the principal amount and the interest on your home loan. Check out other benefits of paying both principal and interest (P&I).

Home Loan Experts Can Help!

Home Loan Experts’ mortgage brokers can negotiate the best interest rates on your behalf so that you pay less interest right from the start. If you’d like us to calculate the interest you’ll pay for different situations and rates, call us on 1300 889 743 or fill in our free assessment form.

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