How to Calculate Home Loan Interest in Australia: A Detailed Guide
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Are you on your way back to Australia and searching for a home loan after having been an expat abroad? Or perhaps you want to apply for a home loan from abroad and want to know more about how much your repayments will be? To understand this in a bit more detail you need more facts on how to calculate home loan interest in Australia.
Understanding many of the factors that can affect how to calculate home loan interest in Australia is a critical part of knowing the amount you are going to repay when approved for a home loan, and there are many factors to think about.
So, whether you’ve just landed in Australia and want to borrow money for property investment or are thinking about homeownership but haven’t got around to crunching the numbers, this article will clear up how to calculate home loan interest in Australia. Let’s begin by looking at principal and interest parts of home loans.
Principal and interest parts of home loans: The key information you need
The main parts to be aware of when paying a home loan as an Australian expat are the principal and interest parts of the loan. To clarify what these are, the principal and interest parts of the loan are separate parts that must both be paid back to the lender or bank that you’re borrowing from.
Now, whereas the principal part of your home loan refers to the loan amount you have borrowed from a lender, the interest part refers to the amount the lender charges you. It’s important to distinguish these as they can both impact how to calculate home loan interest in Australia in different ways, as you shall see.
How to calculate home loan interest: 5 factors to consider
You’re eligible for a mortgage, even as an Australian expat–all you need to think about is how to calculate home loan interest, which is impacted by a few main factors that you will need to consider. From the interest rate to the loan term, to the amount you choose to borrow, and many more, let’s have a look at all of the factors in turn.
Interest rates in relation to how to calculate home loan interest
The interest rate refers to the rate that the lender charges you in terms of the interest on a home loan. Depending on the lender, you might receive an introductory, lower interest rate for a short while, after which the lender will charge you the standard rate.
Now, the interest rate can impact how to calculate home loan interest. For example, if you choose to apply for a home loan of $350,000 and are charged 4.5% in terms of the interest amount, the amount you must pay back in total is going to be greater than $350,000.
One other factor to bear in mind as an expat or Australian resident looking for favourable interest rates, is that depending on the Reserve Bank of Australia and how they set the cash rate, your interest rate can go up or down, which can affect how to calculate home loan interest.
So, let’s go ahead and view an example of how an interest rate relates to how to calculate home loan interest.
- You are searching for and borrow a home loan of $350,000
- The interest rate you are charged is 1.5% p.a.
- You have a 15-year loan term
- Your principal and interest repayments are equal to $1,475.5
- The total interest you pay over the course of the loan is $48,068
Loan amounts you choose to borrow and interest repayment
What can also impact how to calculate home loan interest is the amount you choose to borrow. Borrowing a large sum will mean that the interest you pay will be greater when compared with the option of borrowing a smaller sum.
However, it is the case that certain lenders or banks will extend discounted interest rates if you choose to borrow a larger amount for your home loan, so this will also impact how to calculate home loan interest.
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Outstanding loan amounts: How they affect home loan interest
As you begin to pay off your home loan, and the loan amount begins to decrease in terms of the principal amount, you’ll find that this can impact how to calculate home loan interest. The reason the outstanding loan amount is important is that the more you have paid off, the more your interest repayments will decrease.
Think of it like this: In the event you have borrowed $200,000, have begun to pay off the principal loan amount, and only have $120,000 left as your outstanding home loan amount, you will not have to pay interest on such a high sum. Instead of paying interest on $200,000 you will only pay interest on $120,000.
Loan terms: How this impacts how to calculate home loan interest
When considering how to calculate home loan interest in Australia, the loan term is another factor to think about.
Say you borrow a home loan amount of $450,000. If you pay this off over the course of 15 years, you will minimise the repayments of interest when compared to someone who pays off the same loan amount in 20 years.
To describe this differently, when you pay off a home loan earlier, in a shorter term, you will pay less interest and this will impact how to calculate home loan interest in Australia.
Schedules of repayment: How do they affect how to calculate home loan interest?
The repayment schedule can also impact how to calculate home loan interest in Australia. Normally, the majority of lenders in Australia will let you repay your home loan either in a weekly repayment schedule, every two weeks, or every month.
Now, if you make home loan repayments more frequently–for instance, if you have a home loan of $300,000 and decide to set up a weekly repayment schedule instead of a monthly repayments schedule–you will be able to pay less interest on a home loan.
Interest only home loans compared with principal and interest home loans
What you might also want to go for is an interest only home loan, which is different when compared to a principal and interest home loan.
What an interest only home loan means is that your home loan repayments will be interest-only for a certain time. This type of home loan is a frequent option for investors in property who are seeking an investment mortgage.
When we compare interest only home loans with principal and interest home loans, the key difference is that with principal and interest types your home loan repayments are portioned into the principal amount and the interest amount that is required.
Top ways to save on interest when thinking about how to calculate home loan interest
If your head is spinning from the impact that interest can have on your monthly home loan repayments, there are many ways that you can save on interest when thinking about how to calculate home interest and keep this low. In this section, you’ll find out the best ways to achieve this, from getting a favourable rate, to increasing your repayment schedule, to paying off a home loan in less time. Let’s take a look.
Getting a favourable rate: How does this impact how to calculate home loan interest?
The more favourable your rate is, the better your financial situation may be. You could literally save thousands by getting a favourable interest rate on your home loan and to do this, you might want to shop around or consider a different lender.
Part of getting a favourable rate is having an exceptional credit score. The article we have written on How to Improve Your Credit Score in Australia will go into more detail about this and outline what you should do to achieve this even as an expat.
But just know that it’s important to pay credit cards and bill repayments on time and consider each application for credit carefully as they will appear on your credit report.
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Consider the advantages of offset accounts
An offset account comes with many advantages when it comes to answering how to calculate home loan interest and save on these costs.
What an offset account will let you do is to decrease the amount you must repay in terms of the principal loan amount. It works in conjunction with your savings account and allows you to offset the home loan with your savings.
So, say you have a home loan of $400,000 and you have a saving amount of $30,000. When you link these two accounts together in an offset account, the amount of interest you will be charged applies to $370,000 ($400,000 – minus $30,000).
Opt for a shorter loan term instead of a lengthy term
We’ve mentioned the benefits of a shorter loan term–they can help reduce the interest you pay on your home loan. You can run your own personal circumstances or personal objectives through a loan repayment calculator. But here’s a quick example to help you visualise the difference between a lengthy home loan term and a shorter home loan term.
Scenario A
- You make a decision to take out a home loan of $500,000
- You choose a loan term of 30 years
- Your interest rate is 4%
- Your interest repayments will be $349,347
Scenario B
- You make a decision to take out a home loan of $500,000
- You choose a loan term of 20 years
- Your interest rate is 4%
- Your interest repayments will be $227,176
What this means, as indicated by the loan repayment calculator, is that the loan term can significantly influence your home loan repayments due to how much interest you must pay. If the loan term isn’t long, you will pay less in interest repayments, which is why scenario B is the more favourable of the two.
Increasing the number of repayments you make while avoiding any penalties
How much interest you pay can be determined by the number of repayments you make, so, logically, you might look at the possibility of increasing this.
Now, there are things to watch out for and brush up on (especially if you’re an expat and unfamiliar with the rules) if you choose this option. The main thing to think about are the penalties you might face in certain circumstances.
If you choose to go for a fixed rate home loan, you can face certain penalties if you exceed the number of extra or additional payments made over a certain period. If you want to take advantage of this option to make your interest rates more favourable, you might opt for a variable rate home loan. And this is a key difference between variable rate loans and fixed rate loans.
What are the benefits of choosing home loans that permit unlimited extra repayments?
Some home loans that permit unlimited extra repayments means that you won’t encounter any penalties for contributing extra repayments on a home loan when attempting to repay it faster. Along the way, your interest rate will decline faster as a result of the additional repayments you make.
Of course, you will also pay off the home loan in a faster term when compared with home loans that don’t permit unlimited extra payments. But you’ll also benefit from the opportunity to use a redraw facility. This means that if you require money to spend, you can access it from your own existing home loan.
How to calculate home loan interest: What to remember
The key things to remember are that you can make significant savings on home loan interest, and there are many methods you can use to do it, even as an Australian expat.
When thinking about how to calculate home loan interest and ways to reduce interest, make more frequent payments, keep the loan term small, increase the amount you repay each month, and try to get favourable interest rates with your lender.
The ideal place to get the critical facts on home loans, interest, repayments, and loan terms is odinmortgage.com. Check out our related articles for all the information you need!
Get a free Australian mortgage assessment today.
How To Calculate Home Loan Interest Frequently Asked Questions
What is the formula for calculating interest on a home loan?
Now, keep in mind that there is a specific formula you can use to calculate interest on a home loan, which is to multiply your interest rate (offered by your lender) by the loan amount, and to then divide this result by 365 days. The result of this calculation will give you the interest charged daily, but you can multiply this by the total days within the month to get your monthly interest total.
What are the average variable home loan interest percentages charged in Australia?
The average variable home loan interest percentage charged in Australia is approximately 5.83%. This can vary depending on the home loan provider or lender that you choose and the Reserve Bank of Australia and how they set the cash rate, and your credit score.
What are the average fixed home loan interest percentages charged in Australia?
The average fixed home loan interest percentage that is charged in Australia is approximately 2.93%. This can vary depending on your mortgage provider, who will take your credit score into consideration when making this decision.
How much of a deposit is required to be eligible for home loans as an Australian expat?
Even though the deposit required will depend on the type of home loan you’re looking for, with Odin Mortgage Australian expats are eligible for a home loan with a 20% deposit. This means you will need to have a minimum of 20% of the property’s purchase price.
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