How Are Mortgage Repayments Calculated?
For a principal and interest loan, each repayment covers two components: the interest charged on your outstanding balance, and a portion that reduces the loan principal. Early in the loan, most of each repayment goes to interest. As the loan matures, the split shifts — more goes to principal, less to interest. This is called amortisation.
The standard formula for monthly repayments is:
Where P is the loan principal, r is the monthly interest rate (annual rate ÷ 12), and n is the total number of repayments (years × 12 for monthly).
For fortnightly repayments, the true method divides the annual rate by 26. Some lenders use a shortcut (half the monthly repayment), which gives slightly different results — the fortnightly option here uses the proper 26-period calculation.
The Power of Extra Repayments
Making even small extra repayments can have a remarkable impact on your loan. This is one of the most powerful personal finance strategies available to Australian homeowners.
Example — $650,000 Loan at 6.24% Over 30 Years
| Scenario | Monthly Payment | Total Interest | Loan Ends |
|---|---|---|---|
| Standard repayments | $4,005 | $791,800 | 30 years |
| + $200/month extra | $4,205 | $686,500 | 27 yrs 3 mths |
| + $500/month extra | $4,505 | $584,200 | 24 yrs 1 mth |
| + $1,000/month extra | $5,005 | $467,900 | 20 yrs 8 mths |
Adding just $1,000 per month saves over $323,900 in interest and cuts nearly 10 years off the loan.
Fixed vs Variable Rate Mortgages in Australia
When choosing a home loan, you'll generally choose between a fixed rate, a variable rate, or a split loan that combines both.
Variable Rate
Your interest rate moves in line with the lender's standard variable rate, which is influenced (but not mechanically tied to) the RBA cash rate. Variable loans typically offer more features — offset accounts, redraw facilities, and the ability to make unlimited extra repayments without penalty. When rates fall, your repayments automatically drop. When rates rise, they go up.
Fixed Rate
Your rate is locked for a set period — commonly 1, 2, 3, or 5 years. This gives certainty over your repayments, which is valuable for budgeting. The trade-off is reduced flexibility: you often can't make large extra repayments, and breaking a fixed rate early can attract significant break costs. After the fixed period ends, the loan rolls to the variable rate.
Split Loan
You can split your loan into a fixed portion and a variable portion. For example, $400,000 fixed and $250,000 variable. This gives some payment certainty while preserving flexibility to pay extra on the variable component.
Understanding the Comparison Rate
Lenders must display a comparison rate alongside the advertised interest rate. The comparison rate incorporates the interest rate plus most upfront and ongoing fees, expressed as a single annual percentage. It's designed to give you a more accurate picture of the true cost of the loan.
A loan advertised at 5.89% might have a comparison rate of 6.12% once fees are included — meaning the fee structure adds the equivalent of 0.23% to your effective cost. When comparing loans, always look at the comparison rate. Our calculator uses the stated interest rate; factor in any fees separately when making final decisions.
Offset Accounts and Redraw Facilities
Two features unique to Australian home loans deserve particular attention:
An offset account is a transaction account linked to your mortgage. Any balance in the offset account reduces the principal on which interest is charged. If you have a $650,000 loan and $30,000 in your offset, you pay interest only on $620,000. This is one of the most tax-effective savings strategies in Australia, especially for investors who may eventually turn their home into a rental property.
A redraw facility allows you to access extra repayments you've made. If you've paid $20,000 ahead of schedule, you can redraw that money if needed. Unlike an offset, redraw isn't instantaneous — some lenders take a day or two to process, and some charge fees.
How Much Can I Borrow?
Australian lenders use a concept called borrowing capacity or serviceability to assess how much you can borrow. The key factors are:
- Income: Gross salary, rental income, investment dividends — all assessable income
- Expenses: Living costs, existing debts (car loans, credit cards, HECS), and the new mortgage repayments
- Buffer rate: APRA requires lenders to assess your ability to service the loan at 3% above the current rate, meaning a 6% rate is tested at 9%
- Loan-to-value ratio (LVR): Borrowing more than 80% of the property value triggers Lenders Mortgage Insurance (LMI), which can add tens of thousands of dollars to your cost
As a rough guide, most lenders will lend approximately 4.5–6 times your gross income, subject to the above factors. A mortgage broker can give you an accurate assessment of your specific borrowing capacity.
Frequently Asked Questions
Disclaimer: This calculator is for general informational purposes only. Results are estimates based on the inputs provided and do not constitute financial advice. Interest rates, fees, and lender policies vary significantly. Before making borrowing decisions, seek advice from a licensed mortgage broker or financial adviser.
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