❓Legit question: "How do banks calculate interest on home loans?"
💲Fair question! When you look at your Home Loan Statement, the interest charge will be monthly, and it's probably slightly different each month. How?
Your total home loan interest costs will depend on a number of factors, including:
ℹ️ The amount you’ve borrowed
ℹ️ Your interest rates over time
ℹ️ The term of the loan
ℹ️ Your repayments already made
ℹ️ Any offset accounts
In most cases interest is calculated daily and is based on the balance of your loan. This doesn’t include money in linked offset accounts (if you have them).
If you want to get an idea of your interest charge on a particular day, all you have to do is multiply the remainder of your outstanding loan balance (minus any offset funds) by your annual interest rate then divide it by 365.
EXAMPLE! How to work out interest on your home loan!
You might be surprised at just how easy working out interest costs can be.
If your hypothetical loan balance of $460,000 carried a standard variable interest rate of 2.29% per annum and you didn’t have an offset account, calculating your daily interest charge is as simple as this:
$460,000 x 0.0229 / 365 = $28.86 interest per day
If your repayments are monthly and you didn’t touch your loan during the month (such as by redrawing, for example), working out your monthly interest charge is simple. You just need to multiply your daily interest charge from above by the number days in the month. In the case of January, it’d look like this:
$28.86 x 31 = $894.69 interest for January
Of course, your standard variable interest rate is subject to change at any time, so the amount of interest charged on your loan could change during the month. Your actual repayment amounts will also be different to the amount of interest charged. They’ll include things like principal, interest and fees and are calculated according to factors unique to your loan.
Truly Finance's mortgage broker advice, financial services and property strategies are complimentary. We do this for the best interests of our clients and we strive to be the best mortgage brokers!
James Brett. Principal. Awarded Mortgage Broker ☎️ 0439 591 759
Victor Simone. Principal. Legend Mortgage Broker ☎️ 0449 659 029
Andrew O'Brien. Superstar Mortgage & Finance Broker ☎️ 0451 308 292
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