Understanding your home loan repayments

What you’ll learn

• How your loan gets repaid: amortisation
• Understanding home loan repayments
• As interest reduces, principal payments increase
• Calculating amortisation – an example
• Calculate your own repayment breakdown
• Other types of home loans

 

How your loan gets repaid: amortisation

You repay the home loan in instalments so you can repay it off over the term of the loan. When you have a principal-and-interest loan, each of these instalments contains two parts:

 

Principal: this goes toward reducing your loan.

 

Interest: a payment toward the cost of borrowing the money.

 

Your home loan is amortised, which means it’s on a repayment schedule over time. An amortisation schedule sets out how your loan is paid off over the years, with each year’s repayments and the interest shown. This is often presented in a table, or as a graph.

 

Understanding home loan repayments

When you make your regular home loan repayments, the total amount paid is split, between paying off the principal amount owing and the interest you are being charged for the loan.

 

That’s why when your home loan repayment hits your mortgage account, you’ll see the 'interest payment' leave as a separate transaction.

 

The total amount you owe on the loan will be reduced with each repayment, but the amount of the principal repayment will depend on the gap between your total repayment amount and the interest you need to pay.

 

When your interest rate changes, your repayments will also change but your principal repayments on the same loan over the term will remain the same.

 

• On a fixed interest rate, your repayment will be the same each month, and the amount you owe on the loan will gradually decrease each time you make a repayment. 
• On a variable interest rate, your repayment will vary depending on the interest rate, but the remaining loan amount will continue to decrease the same way over the life of the loan.

 

If you increase your loan or repay a large sum, then your amortisation schedule will change. 

 

As interest reduces, principal payments increase

At the start of a loan period, your total repayments will have a higher proportion of interest and a lower proportion of principal repayment. Toward the end of the loan period, your repayments will have a smaller proportion of interest and a higher proportion of principal repayment.

 

At the start of a loan, it can feel as though you are not making much progress toward repaying the loan principal, but throughout the term the scale gradually begins to tip the other way. Toward the end of the term, almost your entire repayment will reduce the principal.

 

If you want to pay off your home loan faster, you can make additional repayments. This could reduce the amount of interest you pay in total and cut the amount of time it takes you to repay the loan. You can use our home loan calculator to work out what difference it would make if you increased your repayments or made lump sum repayments. Before you do this, check with your lender and read the terms of your contract to see if making extra payments may lead to you being charged additional fees.

 

Having an offset account can be an effective way to reduce your overall interest charges and loan term. Find out more about offset accounts and how they work.

 

Calculating amortisation – an example

Here’s an example of amortisation on a simple home loan:

 

You borrow $100,000 over 30 years, fixed at an interest rate of 5%. Repayments (for both principal and interest) are approximately $537 each month, or $6,445 each year.

 

Year 1: Your interest repayments for the year will be $4,966. At the end of the year, the principal will be $1,475 lower – you now owe $98,525 in total.

 

Year 15: Of your annual repayment of $6,444, now about half – $3,475 – is going toward interest repayments. At the end of the year, your principal has reduced by just under $3,000. You now owe $67,884 in total. You’ll notice that although you’re halfway through the loan term, you haven’t repaid half the loan.

 

Year 30: Your interest repayment is now just $171 for the year, or 2% of your annual repayments. You pay off more than $6,200 and at the end of the year your loan is fully repaid.

 

Calculate your own repayment breakdown

By using our mortgage repayment calculator you’ll be able to see your total estimated repayments and amortisation. Selecting ‘Table’ shows you each year’s repayments and how the principal reduces. If you select ‘Graph’, you can hover over each year to see the breakdown.

 

If you know how much you still owe on your loan and how much your home is worth, you can also calculate how much equity you have in your home.

 

Other types of home loans

Not every home loan is the same.

 

Some loans are ‘interest only’, so each repayment consists only of interest costs. These are typically used for investment properties and only for a limited period of time. For owner occupied loans there’s a limit of five years for interest only. For investment properties it’s ten.

 

During any interest-only period, the amount owed remains the same, but the interest is still charged regularly. Interest only periods often have higher interest rates.

 

Get in touch

We’re here to help – we can talk to you about how your home loan payments are comprised, interest rates, refinancing, and how much you might be able to borrow for your next house. Speak to someone today.