How To Calculate Home Loan Interest

Trying to work out how to calculate home loan interest? Learn how to crunch the numbers here with Savvy.

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, updated on August 7th, 2023       

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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.

How do I calculate the interest on a home loan?

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)

How can I reduce the amount of interest I pay on my home loan?

Frequently asked questions about home loan interest

Why do banks sometimes not pass on rate cuts to borrowers?

When assessing whether or not to pass on rate cuts, banks weigh up the overall state of the housing market, their performance as a business and what their rivals are doing before making their decision.  If it’s in the bank’s best interest not to pass on interest rate cuts, that’s what they’ll do. However, transparency in the market at times creates more competition in the market lenders, as their interest rates are displayed side-by-side next to their rivals, enabling borrowers to immediately see if they’re not passing on interest rate decreases. A good example of this can be seen within our rate table.

Does it make a difference if I choose monthly, fortnightly or weekly repayments?

Yes – you’ll pay slightly less interest overall if you make more frequent repayments. However, the best repayment option for you depends on your income situation. It’s important to assess things like your pay cycle, your ability to meet minimum repayments and your long-term goals with your home loan. If all three options are equally comfortable for you, you may choose weekly payments to save a small amount compared to monthly contributions.

I’m paying more on my home loan than I budgeted for. What can I do to reduce repayments?

If your loan repayments are more than you expected and you’re finding it hard to make repayments, the first thing to do is to speak to your lender and explain your situation. Your lender may be willing to offer you a repayment holiday, which allows you to take a break from making repayments for an agreed period of up to 12 months. There are also other options available, such as switching to an interest-only loan in the short-term (which will cost more overall) or refinancing your loan for one with a lower interest rate and/or longer term to reduce repayments.

If I purchase an investment property, will I be charged a different interest rate?

Yes – investment properties will usually incur higher interest rates than those of standard owner-occupier properties. This is because lenders consider investment loans to be riskier than owner-occupier loans. Investment property interest rates are typically 0.5 to 0.75% higher than traditional principal and interest home loan interest rates.

Does the lowest possible interest rate mean it’s the best home loan option for me?

Not necessarily – when weighing up your home loan options, it’s also important to consider the fees that come with it. While some home loans will offer low interest rates, it may come at the cost of extra fees which add up throughout your home loan. You should also compare loan features such as the ability to have an offset account, permitted early repayments and redraw options. Do your research and compare with Savvy to help you find the right mortgage.

How does my credit score affect the home loan interest rate I’m offered?

Not a great deal – most lenders won’t place a huge amount of weight on your interest rate when assessing your home loan application, given it’ll be backed by a significant appreciating asset (property).  They’re more interested in how affordable the loan is for you than anything else, as they wish to minimise the chances of losing out on money.  As such, as long as your credit file doesn’t indicate you’re at a reasonable risk of defaulting, you’re likely to receive a similar home loan rate to other borrowers.

What’s the difference between advertised home loan interest rates and comparison rates?

A comparison rate is an estimate of how much your loan will cost you when all additional ongoing fees are added in. Lenders are legally required to show customers a comparison rate alongside a product’s base interest rate so the effect of all charges is factored in.

Home loan comparison rates are calculated based on a $150,000 loan over a 25-year loan term, so be aware that fees may affect your loan repayments in a slightly different way to this standardised example.

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