How to calculate principal and interest in home loans

If you’re all about that simple life, calculating the principal and interest components of your regular repayments is as easy as plugging your details into InfoChoice’s calculator (above).

However, if you’d prefer to do the maths yourself, here’s the formula to calculate the interest component on each of your monthly repayments and create an amortisation schedule:

Interest payment = outstanding balance x (interest rate / number of payments per year)

So, let’s imagine you’ve got a \$300,000 home loan with a 5% per annum interest rate and monthly repayments. Your formula would look like this:

300000 x (0.05 / 12) = 1250

And voila! Your regular monthly repayment would include \$1,250 of interest. In the early days, much more of your total repayment will go towards interest, rather than principal.

Now, let’s assume that \$300,000 home loan has a term of 25 years. Using InfoChoice’s home loan calculator, we can see the monthly repayments on such a loan could be expected to be \$1,753.77.

1753.77 - 1250 = 503.77

The shorter your loan term, the higher the repayments will be, but the lower total interest will be payable.

By subtracting \$1,250 from \$1,753.77, we know that the first monthly repayment will see \$503.77 shaved off the principal balance of the home loan, leaving \$299,496.23 remaining.

The interest included in the second monthly repayment, therefore, would be calculated like this:

299496.23 x (0.05 / 12) = 1247.90

And by continuing this pattern, you can work out your own amortisation schedule and learn how much of your repayments will be principal and interest for the remainder of your loan’s life. Or, you could simply use the above calculator – it's your call!

Update resultsUpdate
LenderHome LoanInterest Rate Comparison Rate* Monthly Repayment Repayment type Rate Type Offset Redraw Ongoing Fees Upfront Fees LVR Lump Sum Repayment Additional Repayments Split Loan Option TagsFeaturesLinkCompare
6.04% p.a.
6.06% p.a.
\$2,408
Principal & Interest
Variable
\$0
\$530
90%
Featured
• No monthly or ongoing fees
• Unlimited free redraw
• No application fee
5.99% p.a.
5.90% p.a.
\$2,396
Principal & Interest
Variable
\$0
\$0
80%
Featured APPLY IN MINUTES
• No application or ongoing fees. Annual rate discount
• Unlimited redraws & additional repayments. LVR <80%
• A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
Important Information and Comparison Rate Warning

Base criteria of: a \$400,000 loan amount, variable, fixed, principal and interest (P&I) repayments. All products with a link to a product provider’s website have a commercial marketing relationship between us and these providers. These products may appear prominently and first within the search tables regardless of their attributes and may include products marked as promoted, featured or sponsored. The link to a product provider’s website will allow you to get more information or apply for the product. By de-selecting “Show online partners only” additional non-commercialised products may be displayed and re-sorted at the top of the table. For more information on how we’ve selected these “Sponsored”, “Featured” and “Promoted” products, the products we compare, how we make money, and other important information about our service, please click here.

Monthly repayment figures are estimates only, exclude fees and are based on the advertised rate for a 30 year term and for the loan amount entered. Actual repayments will depend on your individual circumstances and interest rate changes. For Interest only loans – the monthly repayment figure is applicable only for the interest only period. After the interest only period, your principal and interest repayments will be higher than these repayments. For Fixed rate loans – the monthly repayment is based on an interest rate that applies for an initial period only and will change when the interest rate reverts to the applicable variable rate.

The Comparison rate is based on a secured loan amount of \$150,000 loan over 25 years. WARNING: These comparison rates apply only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees together with costs savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. Comparison rates are not calculated for revolving credit products. Rates correct as of . View disclaimer.

Important Information and Comparison Rate Warning

What does ‘principal’ and ‘interest’ mean?

The term principal and interest refers to the two portions of your regular home loan repayments. Let’s break it down.

When you take out a home loan, you’re agreeing to borrow money from a lender and make regular repayments to pay it back over a set number of years or decades. But the lender has to make money somehow - they do that by charging you interest.

That’s why each payment you make can be broken down into two parts: Principal and interest.

The portion of your regular repayments that go towards your principal actively lowers the amount you’ve borrowed. Meaning, the more you pay in principal, the shorter the life of your loan will be.

On the other hand, the portion that goes towards interest does nothing for you financially. Charging interest is the way lenders typically make money and the amount you pay is determined by how much you’ve borrowed and your interest rate.

Key definition: Amortisation schedule

An amortisation schedule sounds more technical than it is but it basically shows that you pay more in interest at the start of the loan, and much more principal later on.

You can see a breakdown of an example amortisation schedule on our home loan calculator.

How to reduce your interest payments

Were you shocked by how much of your regular home loan repayments are going towards interest, rather than paying off your debt? You’re very likely not alone, especially if your home loan is relatively young.

The longer a person continually pays off their mortgage, the smaller their principal balance will likely be compared to where it started. And since the amount of interest charged is based on that balance, the portion of your repayments that go towards interest can be expected to become smaller and smaller as the years go by.

There are three key options to reduce your interest payments and total interest payable:

• Make extra repayments. Even switching to fortnightly payments instead of monthly means you’ll pay nearly one extra month’s worth in the year. You can use the extra repayment calculator to find out if it makes a difference. Be aware that some loans might not allow extra repayments without a fee.
• Make use of an offset account or redraw facility. Just be wary they aren’t exactly the same thing, and fixed-rate home loans might not have the feature. They won’t reduce your repayments but will reduce total interest payable.
• Refinance to a lower interest rate. If you have built up a bit of equity, you can usually refinance to a home loan that has more flexibility or a lower interest rate. Be wary of the costs of refinancing, including break costs if you’ve fixed.

The three options above could shave months or even years off your home loan, potentially saving a lot of money in interest.

How to get a better interest rate

The interest rate offered to you will depend on a number of factors, including your lender, credit score, the type of loan you sign up for, if you’re low-doc, and how much of the total value of a home you’re borrowing through a mortgage.

If you’ve signed on with an uncompetitive lender, you might be able to refinance to another offering lower rates if you’re on a variable rate. Meanwhile, if the loan-to-value ratio (LVR) of your home is notably high, paying down some of your principal might see you eligible for lower rate loans in the future.

Ultimately, though, the cash rate – set by the Reserve Bank of Australia – is arguably the most impactful determiner of interest rates charged to borrowers. So, if you follow all the above steps and still find you’re unable to find a lower interest rate home loan, you might simply have to wait for the central bank to cut the cash rate and hopefully your mortgage rate follows.