How do I calculate interest on my home loan?

To look at it simply, there is a mathematical formula for working out the amount of interest you will pay on your home loan amount. Generally, interest is calculated on your loan balance daily and charged monthly.
Ava Crawford
Written by
Ava Crawford
Imogen Baxter
Reviewed by
Imogen Baxter
Last updated
May 17, 2024
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family sitting on the couch in their living room, playing with their dog in the home that they have a principal and interest loan out on.

When you’re looking to get a home loan in Australia, it’s important to know how the interest rate of your home loan will impact your mortgage repayments and how much interest you will pay over the life of the loan. This can help you select the home loan and lender that is right for you and how you’ll be impacted by rate changes or by making extra repayments.

How is interest calculated on a home loan?

To look at it simply, there is a mathematical formula for working out the amount of interest you will pay on your home loan amount. Generally, interest is calculated on your loan balance daily and charged monthly.

If your remaining loan balance is $500,000 and your interest rate is 5.67% p.a., this will look as follows:

  • To calculate one day of interest: (500,000 x 0.0567) / 365 = $77.67
    To calculate one month’s total interest: 77.67 x 30 = $2,330.10

In this example, we are working off a regular year with 365 days and a month with 30 days (e.g. April). Some lenders will work out interest charges based on a 366-day calendar in a leap year, while others will use the standard 365-day calculation in leap years, so it’s a good idea to check how your lender does their daily interest charges and the number of days they use in their leap year!

Depending on whether you are on an interest-only or principal and interest home loan, as well as the frequency of your home loan repayments, you can calculate what your repayments will be.

Make sure to consult the product disclosure statement and target market determinations before choosing a specific loan product.

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Interest-Only Home Loans

If you get an interest-only home loan, your repayment amounts will be worked out based off the total monthly interest as calculated above.

Interest-only home loans are a loan type that allows you to make fortnightly or monthly payments of just the interest on your home loan for a set period of time. As you’ll be making interest-only repayments and not factoring in the principal amount, these are pretty specific loans, and you may end up paying more over the life of the loan with higher interest rates.

Interest-only home loans are most commonly used by home buyers building a new home or buying an investment property with a mortgage.

Principal and Interest Home Loans

The most common loan type, regular repayments on principal and interest loans, pay interest on the outstanding balance of the loan as well as the principal amount of the loan (the total amount borrowed initially). This will mean your interest payments are more consistent over the loan term, dependent on whether you are on a fixed rate or variable rate at any given time.

To figure out your monthly repayments (or fortnightly repayments, if your home loan allows for flexible repayment frequency), you can plug the details of your home loan and its annual interest rate into a loan repayment calculator.

It’s important to remember, especially with a variable rate home loan, that the cash rate influences home loan interest rates. The Reserve Bank of Australia sets this and has a run-on influence on interest rates across various products (including car loans, personal loans, bank accounts, and credit cards).

As a disclaimer, you will also tend to pay lower interest rates for owner-occupier home loans rather than investor home loans.

What about offset accounts?

Though not all home loans give borrowers access to offset accounts, many full-feature loans (especially those with variable interest rates) may offer offset accounts as a feature to those meeting the lending criteria. An offset account is an account linked to your home loan, but you are only charged interest on the difference between the offset account balance and your home loan balance.

Since the remainder of the money in your offset account is interest-free, this can be a helpful alternative to a transaction account or everyday bank account.

This is one feature you may want to look for when comparing home loans, along with other options like free extra repayments and access to a redraw facility.

Calculating interest on a refinance home loan

Once you have built up sufficient equity in your home and have lowered your loan-to-value ratio (LVR) or find yourself stuck with a too-high interest rate, you may be interested in refinancing. Refinancing can help you pay less interest in the long run, as you can move to a lower interest rate or a home loan that suits your circumstances better.

Whether you are working with a mortgage broker or looking to refinance on your own, make sure to check not just the headline interest rate of the refinance home loan but also the comparison rate. This rate is a legal requirement in Australia and calculates a more accurate depiction of the interest rate you will pay on your loan when you factor in any fees and charges.

Calculating interest on a refinance home loan works in the same way as your first home loan, but there may be a lower interest rate in play as you may have paid off more of your loan balance at this point.


What is my loan-to-value ratio (LVR)?

Your LVR, or loan-to-value ratio, is a number that expresses the percentage of your home’s value made up of a home loan to the amount you have paid. For example, if you have an LVR of 80, you currently have 80% of a loan on your property and have paid 20%. The lower your LVR is, the lower interest rates you’ll usually see on offer (with other lending criteria also at play).

Does my repayment frequency change how much interest I pay?

While your interest rate will remain the same, the overall amount of interest is calculated daily and will therefore usually be reduced if you increase your repayment frequency. That means that going from monthly repayments to fortnightly repayments or weekly repayments could help to reduce your total interest over time.

If you pay half of your monthly repayment on a fortnightly repayment schedule, you switch from making 12 repayments annually to 26 repayments in a year - effectively adding an extra month to your repayments calendar.

A home loan repayment calculator should let you toggle repayment frequency to see the difference that changing it will make.

Will extra mortgage repayments impact my home loan interest?

If you come into some money and would like to make a lump sum repayment to your mortgage upfront, it will actually bring down the interest you pay over the life of the loan. Since you will be paying interest on the money borrowed, chipping away at this (and reducing the loan balance) will cut down the loan term and can result in less interest overall.

How can I pay less interest on my home loan?

While there’s no way of avoiding paying interest on a home loan, there are a few ways to reduce the interest you pay on your loan balance, many of which will depend on the features available on your home loan.

You can take advantage of an offset account, which might have a large deposit requirement, but the interest you save on your home loan could be greater than you could earn on the same amount in a savings account.

You could increase your repayment frequency, which will lessen the amount of interest that adds up over time.

You could also make additional lump sum repayments to help chip away at the principal and interest of the home loan, effectively shortening the loan term and amassing less interest.

You may also want to consider refinancing to another home loan with a lower interest rate, which could potentially result in serious savings over the life of the loan.

With any early exit from any home loan, remember to check for any break costs or early exit fees that could render this more costly than anticipated.

This article is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation, or needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS), or other offer documents before making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).
Prepared by OwnHome Services Pty Ltd ACN 664 492 059. This information does not take your personal objectives, circumstances or needs into account. Always read the disclosure documents for products and services before deciding on a product or service, and consider seeking independent legal, financial, taxation or other advice for your unique circumstances.

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