Calculating the projected cost of your home loan’s interest is a necessary step when comparing your home loan options. Here you can find out how to calculate your home loan’s interest, how to reduce your interest payments, and what factors impact your home loan interest rates.
The amount of interest you pay on your home loan will be impacted by many factors including: your loan amount, loan interest rate, loan duration, frequency of repayments, and whether or not you opt to make additional repayments. The interest on your home loan is best calculated on a daily basis on your loan’s remaining balance.
In order to calculate your home loan’s interest, you must multiply your loan balance by your interest rate as a decimal (e.g., 2.5%=0.025) and divide this figure by 365 days (or 366 days for a leap year). This amount will be your daily interest figure, which then needs to be multiplied by the number of days in a given month to calculate your monthly interest payable.
Your home loan interest rate is bound to be impacted by a range of economic factors. These economic factors can include but are not limited to the following:
The RBA is responsible for setting Australia’s official cash rates (or interest rates) which are charged on overnight loans to banks, your primary lenders. These interest rates impact all Australians as they effect the rates of financial products, including your home loan and its interest rate. The primary goal of the RBA in setting official interest rates, is to ensure a stable Australian currency, strong employment, and a strong economic future, while making sure inflation stays at a low and stable level. While lenders base their interest rates on several factors, the most important one is the RBA’s official interest rate.
Interest rates can go up due to several factors. Interest rates may rise if:
On the contrary, the interest rates may also go down if:
There are numerous ways you can ensure you are paying less interest on your home loan including:
While a standard variable rate will increase and decrease with interest rates decided upon by the RBA, a fixed rate will allow you to know precisely what your repayments will be, and you will avoid the frustration of an increase in interest charges. However, it is important to note that a change to a fixed interest rate may also come at the cost of some loan features and break fees.
If you find that you are paying more interest than you would like on your home loan, consider changing some of your home loan’s terms. This could be adding an offset account, increasing your repayment frequency or asking you lender for a lower interest All thesechanges can significantly reduce the interest you pay over the duration of your home loan.