By Sam Alex, civil engineer · About the author
A home loan is probably the biggest financial commitment most of us make, yet very few people know how their repayment is worked out, or which levers actually reduce the total cost. This article works through one example loan so you can see the numbers.
*This is general information, not financial advice. Speak to a licensed adviser or broker about your situation.*
The example loan
- Loan amount: $600,000
- Interest rate: 6.0% p.a., variable
- Term: 30 years (360 monthly repayments)
How the repayment is calculated
Home loans are amortising: you pay the same amount each month, and each payment covers that month's interest plus some principal. The formula is:
Repayment = P × r ÷ (1 − (1 + r)^−n)
with P = $600,000, r = 0.06 ÷ 12 = 0.005 per month and n = 360. That gives $3,597.30 a month. Over 30 years you'd repay about $1.295 million, so the total interest is about $695,000, more than the loan itself.
Try it with your own numbers in the loan payment calculator or the amortisation calculator.
Why the early years feel slow
In month one, interest is 600,000 × 0.5% = $3,000, so only $597 of your $3,597 payment reduces the balance. The split slowly shifts over time. On this loan, it takes around 18 years before more of each payment goes to principal than to interest.
Lever 1: the interest rate
If the rate rises by 0.5 percentage points to 6.5%, the repayment becomes $3,792, which is $195 more a month. Total interest rises to about $765,000. That's why lenders test your application at a rate about 3 percentage points higher than the actual rate, and why it's wise to budget for rises too.
Lever 2: the term
Choosing 25 years instead of 30 raises the repayment to $3,866 (+$268 a month) but cuts total interest to about $560,000, a saving of roughly $135,000.
Lever 3: extra repayments
Paying $250 a month extra on the 30-year loan: - clears the loan in about 25 years and 4 months - saves roughly $128,000 in interest
Extra repayments go straight to principal, so every dollar stops attracting interest for the rest of the loan. The earlier you start, the bigger the effect. Check your loan allows extra repayments without fees. Fixed-rate loans often limit them.
Lever 4: an offset account
An offset account is a transaction account linked to your loan. Its balance is subtracted from the loan balance before interest is calculated. If you keep $30,000 in the offset for the whole loan (with your repayment unchanged), you save well over $100,000 in interest in this example and finish about three years early. The money stays accessible. Offset savings are also effectively tax-free for an owner-occupied home, unlike interest earned in a savings account.
Lever 5: fortnightly repayments
Paying half the monthly amount ($1,798.65) every fortnight means 26 half-payments a year, the same as 13 monthly payments. On this loan, that pays it off in roughly 24½ years, saving over $140,000. It works because of the extra payment each year, not because of the frequency itself.
What else affects the real cost
- Fees: establishment, ongoing package fees and discharge fees. Compare using the comparison rate.
- Lenders mortgage insurance if your deposit is under 20%.
- Refinancing: a lower rate can save a lot, but weigh up switching costs and any change to the term.
- Resetting the term: refinancing a 25-year-remaining loan back to 30 years lowers the payment but adds interest.
Summary
| Change on a $600,000, 6%, 30-year loan | Monthly repayment | Approx. interest saved |
|---|---|---|
| Baseline | $3,597 | – |
| Rate rises to 6.5% | $3,792 | costs about $70,000 more |
| 25-year term | $3,866 | about $135,000 |
| +$250 a month | $3,847 | about $128,000 |
| $30,000 kept in offset | $3,597 | over $100,000 |
| Fortnightly half-payments | $1,799 per fortnight | over $140,000 |
Frequently asked questions
How are home loan repayments calculated?
With the amortisation formula, using the loan amount, the monthly interest rate and the number of months.
Is it better to pay extra or keep money in an offset?
Both reduce interest by about the same amount. An offset keeps the money accessible, while extra repayments may be harder to redraw, depending on the loan.
How much is the repayment on a $600,000 loan?
About $3,597 a month at 6% over 30 years, before fees.