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Your monthly home loan repayment depends on three things: how much you borrow, the interest rate you are charged, and how long you have to pay it back. These three variables feed into a standard amortisation formula that every lender in Australia uses to calculate principal and interest repayments.
The formula works by spreading the total cost of the loan (principal plus interest) into equal monthly payments over the full loan term. In the early years, most of each payment goes towards interest. As the loan balance reduces, a larger portion of each payment goes towards paying down the principal. By the final years of the loan, almost all of each payment is reducing the amount you owe.
For example, on a $500,000 loan at 5.89% over 30 years, your monthly repayment would be approximately $2,960. Over the full 30 years, you would pay around $565,000 in interest on top of the original $500,000 borrowed, bringing the total cost to roughly $1,065,000.
With principal and interest (P&I) repayments, each payment covers a portion of the interest charged that month plus a portion of the loan balance itself. This means your loan balance steadily decreases over time, and you will own your home outright by the end of the loan term.
With interest only (IO) repayments, you only pay the interest charged each month. Your loan balance stays exactly the same throughout the interest only period. IO periods are typically 1 to 5 years, after which the loan reverts to P&I repayments over the remaining term. Because the remaining term is shorter, your repayments after the IO period will be noticeably higher than if you had been paying P&I from the start.
Interest only loans are most commonly used by property investors who want to maximise tax deductions and keep holding costs low. For owner occupiers, P&I is almost always the better option because it builds equity and reduces total interest paid. Read our full comparison of interest only vs principal and interest.
Making extra repayments is one of the most effective ways to pay off your home loan faster and reduce the total interest you pay. Every extra dollar you put towards your loan reduces the principal balance, which means less interest is charged in every subsequent month. The compounding effect of this over many years can be dramatic.
On a $500,000 loan at 5.89% over 30 years, adding just $500 per month in extra repayments could save you approximately $180,000 in interest and pay off the loan around 10 years sooner. Even smaller amounts make a real difference. An extra $200 per month could save over $85,000 in interest and cut around 6 years off the loan.
Most variable rate home loans in Australia allow unlimited extra repayments at no cost. Fixed rate loans often cap extra repayments at $10,000 to $20,000 per year, so check your loan terms before committing to a fixed rate if extra repayments are part of your strategy. See our 10 strategies to pay off your home loan faster.
The interest rate you pay has a massive impact on your repayments and total loan cost. Even a small reduction of 0.25% on a $500,000 loan saves thousands of dollars over the life of the loan. If you have not compared your rate recently, there is a good chance you are paying more than you need to.
The easiest way to find out if you can get a better deal is to compare your current rate against what is available in the market. A mortgage broker can do this for you across 60+ lenders in minutes, and there is no cost to you for the service. If a better rate is available, your broker handles the entire refinancing process.
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