Have you ever wondered how the interest on your home loan is calculated? Knowing how to compute home loan interest is very important and is a necessary step to take when you’re comparing home loans and working out what you can afford.
You can find out more about home loan interest with Savvy. Learn how to work out how much interest you will pay on your home loan, explore tips on how to reduce it and pay off your mortgage more quickly right here.
The interest on your home loan is calculated daily based on the principal of your loan (the amount you borrow). Home loan interest calculations are conducted using the following formula
(Principal amount x interest rate) ÷ 365 days = daily interest.
To calculate your home loan’s interest, you must multiply your loan balance by your interest rate as a decimal (for instance, 2.5% p.a. would be 0.025) and divide this figure by the days in a year to get a daily interest amount.
Once you know your daily interest figure, you can work out how much your loan will cost you for any given month, year or number of years.
For example, if you have a remaining home loan balance of $600,000 with a standard variable interest rate of 3% p.a., your monthly interest would be calculated as follows:
($600,000 x 0.03) ÷ 365 = $49.32 (interest payable per day)
$49.32 x 30 = $1,479.45 (interest payable for a 30-day month)
It makes sense that the larger deposit you contribute to the purchase price of your home, the less you’ll have to borrow and the less interest you’ll pay overall. If you decide to refinance your home loan, or are in the process of saving up for one, consider contributing a larger deposit than the usual 20% required by most lenders wherever possible.
This will assist you in getting approved for loans with the lowest interest rate available.