Mortgage repayment calculator

How a home loan repayment is worked out

A principal and interest repayment is a fixed amount that pays off the whole loan by the end of the term. Each payment covers the interest that accrued since the last one, and whatever is left over comes off the balance.

Early on, most of your payment is interest. On a $600,000 loan at 6% over 30 years, the first monthly repayment of about $3,597 puts roughly $3,000 towards interest and only $600 towards the debt. That ratio flips gradually, and by the last few years almost all of it is principal.

This is why extra repayments made in the first five years are worth far more than the same money later. Every dollar off the balance early removes interest that would have compounded for another twenty-five years.

What the calculator does not include

It shows the scheduled repayment on the loan itself. Several real costs sit outside that number, and a repayment figure quoted without them will be lower than what leaves your account.

• Annual package fees, which typically run a few hundred dollars a year
• Lenders mortgage insurance, which is normally added to the loan and increases the balance being repaid
• Offset account balances, which reduce the interest charged without changing the scheduled repayment
• Extra repayments and redraw activity
• Any rate change during the term, including a fixed rate rolling off
• Council rates, water, insurance and strata, which are not part of the loan at all

It also assumes the rate you enter holds for the whole term. No variable rate has ever done that. Treat the total interest figure as a comparison tool between two loans, not as a prediction of what you will pay.

What actually changes your repayment

Three levers move the number, and they do not move it equally.

1. 1

   The rate

   The most powerful lever and the one people focus on. On a $600,000 loan over 30 years, half a percentage point is worth about $195 a month and around $70,000 over the full term.

2. 2

   The term

   Stretching a loan out lowers the monthly figure and raises the total cost. Cutting a 30-year loan to 25 years on the same $600,000 adds about $270 a month but saves around $135,000 in interest.

3. 3

   The balance

   A larger deposit lowers the repayment and, if it gets you under an 80% loan-to-value ratio, removes lenders mortgage insurance as well. The second effect is often worth more than the first.

Fees barely register against any of these. A loan with a $395 annual package fee and a rate a quarter of a point lower will beat a no-fee loan on almost any balance above $200,000.

Weekly, fortnightly or monthly: does it matter?

It matters, but not for the reason usually given. The common claim is that fortnightly repayments save you years off the loan. That is only true when the lender sets the fortnightly amount at half the monthly amount.

There are 26 fortnights in a year but only 24 half-months. Paying half the monthly figure every fortnight means you make the equivalent of 13 monthly payments a year instead of 12, and that extra payment is what shortens the loan.

This calculator does the honest version. It divides the annual cost across the frequency you choose, so weekly, fortnightly and monthly come out close to identical. If you want the accelerated effect, ask your lender to set the fortnightly repayment at exactly half the monthly one.

Principal and interest versus interest only

An interest only repayment covers the interest and nothing else, so the balance at the end of the interest only period is the same as at the start. On a $600,000 loan at 6% that is $3,000 a month against $3,597, which is a real difference to cash flow.

The catch arrives when the period ends. You then have to repay the full balance over a shorter remaining term, and the repayment jumps sharply. A five-year interest only period on a 30-year loan leaves 25 years to clear the whole debt.

It has legitimate uses, mostly for investors and for people with genuinely lumpy income. As a way to afford a house you could not otherwise afford, it is a problem deferred rather than solved, and lenders assess it accordingly.

What lenders do differently

The arithmetic is the same everywhere. What differs is the rate you are offered and the conditions attached to it, and the spread across a panel of forty lenders is wider than most people expect.

Some lenders price by loan size, with a better rate above $750,000. Some price by loan-to-value ratio in tight bands, so an extra $5,000 of deposit moves you into a cheaper tier. Some hold their sharpest pricing for refinances and never advertise it.

Your bank will only ever offer you your bank's loan. That is the whole argument for having someone compare the panel before you sign, and it is worth more than any tweak you can make to the numbers above.