How are mortgage repayments calculated? Home loan costs broken down

Every month or fortnight, your home loan lender will bill you a specific amount of money to chip away at the total cost of your mortgage until you discharge it.

These costs, called "mortgage repayments", vary based on your home loan type, interest rate, the size of your principal, payment schedule, and any administrative fees you incur. 

How do lenders calculate your mortgage repayments? Let’s break down what you need to know.

Home loan repayments chip away at the total debt you took out at the start of your mortgage. "Amortisation" is the process of breaking down your home loan principal into these individual payments for 20 to 30 year terms.

A standard mortgage repayment typically includes these costs: 

• Principal repayments
• Interest rate charges
• Fees

Principal repayment

Your principal repayment is a chunk of the original loan amount you borrowed. If you initially borrowed $500,000 from a lender, then your principal is $500,000.

This money is divided by the number of months or fortnights in your home loan term. For example, a 25-year home loan will spread the principal out over 300 months, making 300 principal repayments. 

Some home loans just charge interest-only repayments for the first few years. These loans don’t pay down any of your principal, so you don’t build any home equity, but they can reduce the size of your repayments for a while.

Interest rate

Interest is calculated daily by your lender and added to your mortgage repayments.

At the end of every business day, your lender multiplies your loan’s interest rate by how much of your principal you have left to repay, then divides this amount by 365 days, or 366 if it’s a leap year.

A monthly mortgage repayment will usually have 30 to 31 days of interest included in it.

The type of interest rate you have can also affect your mortgage repayments. Variable interest rates ‘vary’ over time, which changes the amount of interest you pay, while fixed interest rates stay the same for a short term, typically 1 to 5 years.

Home loan fees

Lastly, your lender may charge administrative fees. These fees cover the maintenance and account-keeping required for your mortgage. Fees can be ongoing or once-offs.

There is no such thing as a truly fee-free home loan, since third-party charges may apply. Always read the product disclosure statement and target market determination before applying for a home loan. 

When comparing home loans, it is useful to do your own calculations to see how much a home loan could cost in mortgage repayments.

Mozo’s mortgage repayment calculator is designed to take your principal, loan term, and interest rate into account and give you an idea of how much you would pay monthly and how much interest you could pay over time.

Our other home loan calculators can run your mortgage through different repayment scenarios to give you an idea of how much a home loan could cost in total.

• Our rate change calculator shows you what happens to your monthly repayments if your interest rate goes up. 
• Our home loan comparison calculator compares two home loans to give you an idea of how much each loan might cost.
• Our borrowing calculator looks at your income and expenses and estimates how much you can afford to borrow and repay monthly.

Aside from your mortgage repayments, however, there are some other home-buying costs you may need to consider. 

For instance, our stamp duty calculator determines how much you could have to pay in stamp duty. Stamp duty is a government tax on transferring a property title and could cost tens of thousands of dollars.

While stamp duty is not part of your home loan, it is still an important bill to budget for when buying a home.

Your home loan costs should not be more than 30% of your before-tax pay check. The Australian government considers 30% to be the threshold for mortgage stress. 

To find your mortgage stress limit, multiply your monthly take home income by 0.3. The result is the maximum amount you should be paying for your monthly mortgage repayments, if you want to avoid mortgage stress.

Mortgage stress limit ($$) = 0.3 * (monthly income)

Yes, home loan repayments decrease over time. This is because the amount of interest you pay decreases over time. 

Because you pay down more and more of your loan, your interest rate is calculated with a smaller outstanding loan balance.

So, while the size of your principal repayment will remain consistent for all your mortgage repayments, the amount of interest charged will fall.

There are several strategies you can take to lower your mortgage repayments. 

If you haven't applied for a home loan yet

The main way to reduce the size of your mortgage repayments is to reduce the size of your principal, which means looking for cheaper properties. This way, you don’t have to borrow a large home loan – or save as much for a home loan deposit. 

The size of your home loan deposit can also impact your mortgage repayments. Deposits establish your loan-to-value ratio (LVR). The lower your LVR, the lower your interest rate.

Aim for a 20% deposit (or an 80% LVR) to access a lender’s most competitive interest rates.

If you already have a home loan

If you’re already servicing your mortgage, you can focus on reducing your interest rate to save costs. 

Here are the key ways to lower your home loan interest rate:

• Paying down as much of your principal as possible with extra repayments.
• Filling up your offset account, if you have one.
• Calling your lender to negotiate a lower interest rate.
• Refinancing your home loan. 

Note if you want to refinance, you’ll need to establish your home equity by doing a property valuation. If your LVR has lowered either because your home value has risen or you’ve repaid more of your home loan, you may be eligible for a lower LVR tier and thus, a lower interest rate. 

Additionally, when comparing home loans, pay attention to the fees charged with a mortgage account. While they don’t make up most of your home loan, a $20 monthly fee still adds up to $240 yearly. 

Compare home loans in the table below.