Do you know how interest works on your home loan? If not, read this blog post to find out! We’ll explain how interest is calculated and how it affects your monthly payments.
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What is interest?
Put simply, interest is the cost of borrowing money. When you take out a loan , the interest is the additional amount of money that you will have to pay back on top of the principal, or the amount that you borrow. Interest is typically expressed as a percentage of the principal.
Types of interest
There are two main types of interest, simple and compound. Most home loans are arranged with compound interest, where the interest is calculated on the outstanding loan amount, as well as any interest that has already been paid. This means that the debt (and the amount of interest you pay) grows much faster with compound interest than it does with simple interest.
How is interest calculated?
Interest on a home loan is calculated based on the amount of the loan, the interest rate, and the number of days in the loan term. The interest rate is expressed as an annual percentage rate (APR). The APR is the actual rate charged for one year, including any fees paid to acquire the loan.
The interest calculation starts with what’s called the mortgage balance, which is the remaining principal balance on your loan. From there, your daily interest charge is calculated by taking the mortgage balance and multiplying it by your interest rate (as a decimal), and then dividing that number by 365 (the number of days in a year). That will give you your daily interest charge.
How does interest work on a home loan?
The interest rate on a home loan is the cost of borrowing money from the lender. It is expressed as a percentage of the loan amount and is paid over the life of the loan. The higher the interest rate, the more expensive the loan will be.
The effect of interest on home loan repayments
Interest is essentially the cost of borrowing money, and every home loan comes with interest charges. The amount of interest you pay will depend on the type of loan, the lender, the loan amount and the loan term (the length of time you have to repay the loan).
The interest rate on your home loan is set by the lender, and can be fixed or variable. A fixed interest rate means that your repayments will stay the same for a set period of time (usually between one and five years), even if interest rates rise during that time. A variable interest rate means that your repayments may go up or down depending on changes in market interest rates.
The amount of interest you pay each month is determined by your loan’s interest rate and its principal (the outstanding balance of your loan). The higher the principal, the more interest you’ll pay; and the higher the interest rate, the more you’ll pay each month.
In order to reduce the amount of interest you pay over the life of your loan, it’s important to make regular extra repayments. This will help to reduce your principal faster, so that less interest accrues each month.
How to minimise the amount of interest you pay on your home loan
Paying off your home loan as quickly as possible will save you a lot of money in interest payments. Here are some tips to help you do that:
-Make sure your loan is on a variable interest rate, so you can take advantage of any interest rate cuts by your lender.
-Extra repayments. Make additional repayments whenever you can, even if it’s just a small amount. Every little bit helps and will reduce the interest you pay in the long run.
-Offset account. An offset account is linked to your home loan and works like a savings account. Any money you have in the account offsets the amount of money you owe on your loan, which reduces the amount of interest you pay.
-Fix your interest rate. If interest rates are low, consider fixing your interest rate for a set period of time. This will give you peace of mind knowing that your repayments won’t go up even if rates do.