How is interest calculated?

How is interest calculated is simply on your outstanding balance on a daily basis and charged to your home loan account once a month. For this reason, and because of the number of days between interest charges varies, the amount of interest charged each month may also vary.

To calculate interest only repayments, your loan balance is multiplied by the interest rate, then divided by 365 days in a year, then multiplied by the number of days in the current month.

Go to our loan repayment calculator to make this job easy for you. This calculator will also calculate your weekly, fortnightly, and monthly principle & interest repayments.

Where can I find out my interest rate?

You can find out your current interest rate on the first page of your home loan statement or on your internet banking screen.

Why does interest exist?

The person or company lending money is giving up other uses for that money until the loan is repaid. The interest is supposed to make up for the fact that the person or company could have spent that money in ways that brought in extra value.

Learn the difference between simple interest and compound interest.

You’ve just calculated simple interest, in which you only pay interest on the principal you borrowed. Many credit cards and other loans, however, utilise compound interest, where the interest you owe gathers interest of its own. Compound interest can result in much higher interest over time than simple interest. Use our borrowing capacity calculator to help you calculate principle and interest repayments.

Here’s a side-by-side comparison of interest only vs principle and interest:

  • You take a loan out for $100 at 30% simple interest. You’ll owe $30 interest after the first time period, $60 after the second, $90 after the third, and $120 after the fourth.
  • You take out a second loan of $100 at 30% compound interest. You’ll owe $30 interest after the first time period, then $69, then $119.70, then $285.61.
  • Multiple other factors can come into play when calculating more complex forms of interest, including credit risk and inflation.

Talk to us

Contact us on 03 9700 7033 8:30am to 8:30pm Monday to Friday to arrange a free Home Loan Health check.

About the author

Matt Carra

Matt Carra

Matt Carra is the Owner of Blue Key Finance, a Finance Broker since 2004, an SMSF Lending Specialist, a Property Investment Educator, and a Mentor to new Finance Brokers entering the finance industry. Matt is passionate about providing valuable guidance and honest advice, educating Australians on how to buy their first homes and invest successfully while protecting them with knowledge. Matt has strong long-term relationships with his panel of lenders and extensive knowledge on their credit policies, and utilises that skillset to give you peace of mind by recommending you to the right lender the first time, to negotiate a better deal, and to fight for your cause – that’s Matt’s commitment to you. Contact Matt today to start the conversation on 03 9700 7033 or email matt.carra@bluekeyfinance.com.au