When you take out a mortgage, you're required to make regular repayments to pay off the amount you borrowed, plus interest and any fees.
Your home loan repayments are determined by several factors, all of which can impact the total cost of the home loan.
Calculating interest on a home loan is typically done daily and charged monthly on a specified due date by the lender or weekly or fortnightly, depending on your repayment frequency. Each day, your home loan lender multiplies your interest rate by the outstanding home loan amount and divides it by 365 days to calculate daily interest.
For example, if a homeowner had a 25-year $500,000 home loan with an interest rate of 2.5%, the daily interest charge would be $34.25. To determine the monthly interest charge, simply multiply this daily interest charge by the number of days in the month. This interest charge is added to the principal amount and is the total home loan repayment for interest-only repayments.
To calculate your mortgage repayments, you'll need the following information:
Principal Loan Amount
This is the amount you plan to borrow from your lender. Generally, the more significant the loan amount, the greater the mortgage repayments over the life of the loan. For example, if the property you’re purchasing costs $650,000, and you have a 20% deposit of $130,000, your principal loan amount is $520,000.
Interest Rate
Your mortgage interest rate determines how much you’ll pay in interest charges. Generally, a higher interest rate results in higher mortgage repayments. If you’re unsure about what interest rate to use, you can use the default rate provided or look up advertised comparison rates to get a more accurate estimate of your repayments.
Loan Term
The length of your loan term determines how long you’ll have to make repayments. This is usually 25 or 30 years but can vary depending on your lender and specific loan terms. Some lenders allow up to 40-year home loan terms.
Other Factors That Impact Your Home Loan Repayments
Repayment type
Choosing to repay principal and interest or interest-only can impact your home loan repayments.
Repayment frequency
Making weekly, fortnightly, or monthly repayments will impact your repayment amounts and household budget.
Features
Utilising features such as offset accounts can impact your repayment amounts as any funds deposited into the account work to ‘offset’ or reduce your interest repayments.
Central bank cash rate
Interest rates will fluctuate over a 20-30 year home loan term. The Reserve Bank of Australia’s cash rate is one of the most significant factors influencing this.
Once you have this information, you can use a mortgage repayment calculator to estimate your regular home loan repayments. You can also speak to your lender or a mortgage broker, who can provide a detailed breakdown of your repayments and any other costs associated with your mortgage.
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