Calculating your home loan repayments can help you to ensure you’re balancing your household budget and choosing the right home loan for your needs.
But while this may take the hard work out of discovering and comparing repayment amounts, it’s important homeowners understand how key factors of a home loan impact the repayment amount, and how to reduce their repayments accordingly.
Reduce Home Loans’ offers several home loan repayment calculators that allow everyday Australians to not just calculate mortgage repayments, but also:
- Calculate the difference extra repayments may make, or
- Calculate how much using an offset account could reduce the interest repayments.
Factors that impact your home loan repayments
Calculating your home loan repayments is all about looking at the loan amount (principal), the interest rate, the loan term and the loan frequency. These are some of the most significant loan details that can impact the amount you repay for your home loan.
|Loan amount||The total outstanding (principal) of your mortgage, calculated by subtracting your deposit (LVR) from the property value. Understandably, the larger the loan amount the greater the mortgage repayments over the life of the loan.|
|Loan term||The length of time you repay your mortgage, typically 20-30 years.|
|Interest rate||The rate of interest charged on your loan amount. The higher the interest rate the higher the mortgage repayments, generally speaking. Choose from fixed rates, variable rates or you may opt to split your interest rate repayments between these two options. Read on to discover how interest is calculated.|
|Repayment type||Choosing to repay the principal and interest or the interest-only can impact your home loan repayments.|
|Repayment frequency||Making weekly, fortnightly, or monthly repayments will impact your repayment amounts and impact your household budget.|
|Features||Utilising features like an offset account can impact your repayment amounts as any funds deposited into the account work to ‘offset’ or reduce your interest repayments.|
|Reserve Bank cash rate||Over a 20-30 year home loan term, interest rates will fluctuate. One of the biggest factors influencing this is the Reserve Bank of Australia’s cash rate. Keep abreast of any changes to the cash rate, including commentary and expert forecasting, so you can prepare your budget for home loan interest rate changes.|
Factors like the potential fees and charges of a home loan will impact the total cost of the loan, but these are not generally charged on a monthly basis. It’s still crucial that you compare the fees and charges of a home loan before applying to understand the true cost of a loan.
For example, while one home loan may advertise a low interest rate, it may charge a higher-than-average annual fee, which outweighs the benefits of the competitive rate. This is where a comparison rate may come in handy.
Comparison rates are one way to gauge the true cost of a loan as they take into consideration the interest rate as well as most of the fees involved, such as an establishment fee and the annual fee.
Keep in mind that comparison rates are based on a slightly-outdated loan amount of $150,000 over 25-years as they were proposed when the average mortgage size was considerably smaller than today.
But they can still indicate if a home loan is charging high fees and which may be better for your home loan repayments if the comparison rate is considerably higher than the advertised rate.
How to calculate interest on a home loan
Generally speaking, home loan interest is calculated daily and charged monthly on a specified due date by the lender.
It may also be charged weekly or fortnightly, depending on your repayment frequency. This means that each day, your home loan lender will multiply your interest rate by the outstanding home loan amount, and divide 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%, you would calculate as follows:
- ($500,000 x 0.025) ÷ 365 = $34.25
To discover how much this hypothetical homeowner would pay each month, simply multiply this daily interest charge by the number of days in the month.
- $34.25 x 30 = $1,027.40 in interest
This is the amount the homeowner would pay in interest on top of their principal amount in a month. If the homeowner was making interest-only repayments, this would be the total home loan repayment they would pay.
Home loan calculators to discover your mortgage repayments
There are several home loan calculators that may help you to better understand your repayments.
As mentioned earlier, the simplest mortgage calculator you can use is a Home Loan Repayment Calculator. Just enter your loan amount up top, then enter the loan term, the interest rate and repayment frequency.
Using the hypothetical home loan above, the calculator will then display the periodic repayment amount as well as the total cost of the loan, including interest, over the loan term. In this instance it would be:
- Periodic payment = $2,243.08
- Total cost of loan = $672,925.10
You may also compare different loan options using this same calculator if you’re narrowing down your shortlist. Perhaps you’re tossing up between a basic home loan and one that offers more flexibility with features. You can enter the same loan amount and the two different interest rates to see how repayments could compare, and which one would best fit your financial situation.
Reduce Home Loans’ Extra Repayment Calculator may help to calculate how much better off your home loan repayments would be if you made extra repayments on your mortgage. Similarly to the above calculator, enter your loan amount, loan term, interest rate and repayment frequency, plus how much you want to pay additionally.
The Extra Repayment Calculator will then display how much you may save in interest as well as time by making said extra repayments. You’ll also be given an updated loan term to reflect how much you’re chipping away your principal by.
For example, on the same hypothetical $500,000 home loan, if the homeowner made an additional payment of $250 each month five years into their home loan, they would save:
- $15,401.07 in interest
- 2 years, 6 months in time
As mentioned earlier, an offset account is a home loan feature that may help to impact the amount you pay for your home loan repayments. Any funds you deposit into this offset account, which looks like a transaction account, helps to reduce the amount of interest charged on the home loan.
On the same hypothetical home loan, if the homeowner deposited $70,000 into their offset account this would mean they only pay interest on $430,000. The $70,000 in the offset account works for you to help reduce the interest payable on the total loan balance. Which, put simply, means you may pay less interest each repayment.
Reduce Home Loans’ Offset Calculator shows you just how much of an impact a lump sum deposit into your offset account could make on your regular repayments, as well as on the total interest payable.
Just starting your home loan journey? Consider using Reduce Home Loans’ Borrowing Power Calculator to discover how much you may be approved to borrow for your first home, depending on your eligibility. Or utilise the Stamp Duty Calculator to understand the total upfront payment needed.
How to reduce your home loan repayments
Now you know how to calculate your home loan repayments, you may be looking for options to ensure you have the cheapest home loan for your budget.
There are several ways homeowners can work to reduce their home loan repayments, including:
- Make extra repayments: We’ve already crunched the numbers on just how much of a dent making extra repayments could mean for your home loan. If your lender allows you to make additional repayments without penalty, consider funnelling some of your income towards this goal each month to chip away at your principal owing.
- Utilise home loan features: Again, now we’ve calculated how much using an offset account may help to reduce interest payable, it may be worth prioritising a home loan that offers this feature. You may also want to consider features like a redraw facility as well which may also help to reduce your interest payable.
- Consider the loan type: If your aim is to keep your expenses as low as possible for a fixed period, it may be worth considering interest-only loan repayments. For investors, this can be a competitive option to help reduce expenses and maximise your return on investment. Owner-occupiers struggling with budgeting after securing their new home may also consider this option to keep repayments low initially.
- Choose a competitive lender: Instead of sticking with your childhood bank, make sure you do your research to ensure your home loan lender is offering you a worthwhile deal – especially if you’re looking to refinance. For example, Reduce Home Loans consistently breaks records by offering some of the most competitive rate home loans around.
Whether you’re a first home buyer or considering refinancing, compare home loan options with Reduce Home Loans today.
To speak to an expert about getting the most competitive home loan deal for your financial situation and budget, please don’t hesitate to call Reduce Home Loans on 1300 733 823.
Any statements are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.