Alan Hartstein
Georgia Rose
Athena Cocoves
Knowing what makes up your monthly mortgage costs and how repayments work has plenty of benefits, especially for first-time home buyers. With an understanding of the relationship between principal and interest on your home loan, you can better learn how your payment is calculated.
How do mortgage repayments work?
Home loan repayments in Australia are calculated by a process known as amortisation, which means you pay back the loan over a period of time rather than in one go. In mortgage terms, that means paying off the cost of your home on a fixed schedule (such as every month) over an agreed-upon term of usually 20 to 30 years.
Home loans have two primary components:
- Principal. This is the amount you borrowed to buy the home.
- Interest. This is an agreed-upon percentage of the principal you pay the lender. In short, it’s the cost of borrowing money to buy a home.
In general, mortgages in Australia are a type of variable interest rate loan. This means the interest rate fluctuates with the lending market — when rates are low, your interest is low; when rates are high, your interest is high.
Some loans have fixed rate periods at the start of the mortgage, such as for the first five years. There are also partially fixed rate mortgages available, which use a combination of fixed and variable interest rates.
In addition to the principal and interest payments, you may face the following monthly fees when repaying your mortgage:
- annual service fees
- monthly service fees
- late payment or other electronic banking fees, if applicable
- homeowners insurance
- council rates
- strata fees
- utility bills
- ongoing home maintenance costs.
Home loan repayment options
While many different types of home loans are available in Australia, there are only two loan repayment options: principal-and-interest and interest-only.
Principal-and-interest loans
Most home loans are principal-and-interest, meaning you repay both principal and interest over the length of the loan.
The majority of your payments in the first few years go towards the interest. So, paying more than the minimum amount due in these early years can help you pay down the interest faster and shorten the length of the loan.
Interest-only home loans
An interest-only loan is a loan where you are only required to pay back the interest portion of the amount borrowed for a set time, such as the first five years. After which, you start paying both interest and principal.
Interest-only loans have their risks. You won’t build up any equity in the home until after the interest-only period is over. Plus, the payments after the interest-only period ends are typically much higher than what you pay at the beginning.
How to calculate mortgage payments
It’s important to understand how much you can borrow before shopping for a home and how much you’ll have to fork out every month for the loan. Use the below mortgage calculator to find out how much your repayments will be.
Use the Moneysmart mortgage calculator to figure out how much your repayments will be.
Mortgage repayment calculation: Example
The below example is based on a $584,907 loan (the average loan amount in August 2023, according to data from the Australian Bureau of Statistics) and a 5.94% interest rate (the average rate in August 2023, according to Moneysmart).
Amount borrowed
$584,907
Interest rate
5.94%
Monthly fees
$10
Loan length
25 years
Monthly repayment: $3,757
Mortgage payment calculation
If you want to complete the calculation manually, you can do it by using the below equation.
M = P [r(1+r)^n] / [(1+r)^n – 1]
M: Mortgage payment (monthly)
P: Principal (loan amount)
R: Monthly interest rate (annual rate divided by 12)
N: Total number of monthly payments (loan term length multiplied by 12)
» MORE: Should I fix my home loan?
Choosing your mortgage repayment schedule
When it comes to the frequency of your mortgage repayments, you can pay weekly, fortnightly or monthly. Quarterly and annual mortgage repayments do exist but are rare.
Your personal financial situation tends to dictate the frequency. For example, if you have a regular fortnightly pay packet, you may prefer to have your mortgage taken out right after payday.
Fortnightly payments
The frequency of your mortgage payments does affect the amount you pay over time.
In general, making fortnightly payments can help you pay off the loan faster. This is because there are 26 fortnights in a year.
Using the above example, if your monthly mortgage repayment is $3,757, you’ll make a $3,757 payment 12 times per year, equalling $45,084. But, if you pay half of that amount every two weeks ($1,879 every fortnight), you’ll end up paying $48,841 after one year. Over time, that can shave two years off the loan.
Frequently asked questions about home loan repayments
Frequently asked questions about calculating home loan repayments
You can repay a home loan faster if you make more than the minimum payment required, even if it’s just a few hundred dollars extra each month. Switching to fortnightly payments can also help you pay off the loan faster.
Yes, if you refinance, you may be able to get a lower interest rate and reduce your payments.
DIVE EVEN DEEPER
Mortgage Glossary and Home Loan Terminology
Confused by mortgage jargon? This glossary of home loan terminology includes words and phrases first-time buyers are likely to encounter in Australia.
17 Types Of Home Loans For Buyers, Investors And Property Owners
Know the common home loan types for Australian buyers, investors and property owners so you can choose the best option for you.
How To Get A Home Loan
The home loan application process can be thorny. Here’s how to approach it.
What is Principal and Interest on a Home Loan?
Principal is the amount of money borrowed from a lender; interest is the extra amount charged by lenders in exchange for using their funds.