How's Mortgage Repayment Calculated?
There is no such thing as a free lunch nor is there a mortgage that doesn’t need repayment. When Banks lend money, they do so with an expectancy that it will produce an income for them in the form of interest charged on the principle lent.
Mortgage repayment calculation consider these five factors:
Loan amount – contracted principle and Interest loans repayments are based on amount borrowed whereas interest only repayments are based on loan balance
Interest rate applied
Amortisation – process of paying off debt over time, typically 30 years for a mortgage
Number of days in the month – compounded interest stated will be greater for months with greater number of days
Repayment frequency – lenders will typically allow loan repayments to be contracted on weekly, fortnightly or monthly basis. When compared, the difference between weekly and fortnightly repayments are nominal however there can be a significant difference between fortnightly and monthly repayment amounts.
Important tips to keep in mind:
Compounding
Most interest are calculated daily and repayment consisting of principle and interest amount is stated monthly except in interest only loans, where the repayment does not include any principle portion of the loan.
Where possible, make repayments on fortnightly basis. If your lender only contracts loans repayments on monthly basis, divide the repayment by 2 and pay that amount on fortnightly basis. This will ensure that you are always making more than the required amount when annualised.
Variable Rate Mortgages
If you’re in a variable rate mortgage, your repayment will increase or decrease in response to changes made to your lenders standard variable rate (SVR). This is due to the contracted discount applied to your loan is always against the lenders SVR.
Interest Prepayments
Only allowed by lenders for Investment Interest Only loans and interest rate is determined on application
Used by high income earners wanting to bring their tax offset forward by a financial year.
How to pay off your mortgage quicker
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Get an offset account - Home loans with offset accounts allow you to reduce the principal amount that you need to pay interest on. Note, if there is an account keeping fee, this will reduce some of the offsetting benefits.
Make frequent repayments - The more frequently you make regular loan repayments, the less interest you will have to pay over the life of the loan – so consider a weekly or fortnightly repayment schedule instead of a monthly one.
Make additional repayments - The ability to make extra repayments without penalty is a good feature to look out for. The quicker you pay down your loan amount, the less interest you will need to pay on your smaller outstanding loan amount.
Choose a shorter loan term - The longer you take to pay off your loan, the more interest you will end up paying. Remember, banks calculate interest on your loan amount daily, so choosing a 25-year loan term instead of 30 years can make a big difference.