How to Calculate Interest on a Home Loan?

While you are in the process of borrowing a home loan, you must be sure of the interest that you should be paying. Even though Mortgage brokers help you gain an estimate of the amount that you must repay, learning it on your own even before getting in touch with a mortgage broker would help you understand how mortgage repayments work and how you can reduce them.

Mortgage repayments have two parts- paying back the money you borrow – the principal amount and the interest charged by the lender. This interest amount, however, adds up to a huge amount of money in addition to your loan amount. However, there are multiple factors that affect the amount of your interest repayments.

Interest on the home loan is generally calculated daily and then charged to you at the end of each month.  You will be paying the outstanding loan amount at the end of each business day and multiply it by the interest rate that applies to your loan and later divide it by 365. To work out on how much interest you would be giving to the bank while repayment of the loan, you may input the details into the mortgage calculator at Your Finance Adviser. Given below are a few factors that affect the amount of interest you pay-

• The Home Loan interest Rate is one which is charged by the bank as interest on the loan.
• The Reserve Bank’s official cash rate decides the interest rate charged by the bank on your loan  However, The official cost of borrowing can prompt the lenders to charge a higher or lower amount of interest outside RBI cash rate movement.
• The amount you borrow is directly corresponding to the amount of interest that you pay. The bigger the principal amount, the more the interest to be paid.
• The Outstanding loan amount shows that as you gradually pay off the money you borrow, you will be paying the remaining interest on a small amount, thereby gradually reducing your interest payments.
• The loan term or the time you take to pay off your loan affects the amount of interest you pay. Paying your loan off over a shorter period will minimize your interest repayments.
• The Repayment frequency decides the amount of interest you pay each time depending on your repayment schedule. More the frequency of repayments, lesser the interest to be paid.
• Having an offset account allows you to reduce the amount of interest that you pay on your loan.

Each lender or bank has a wide range of different loan options with varied interest rates. A good mortgage calculator will help you estimate your interest repayment amount and make a better choice. Given below are a few important terms to be understood while considering interest rates-

• Variable Rate Mortgage– A variable rate implies that the interest rate may vary over the loan period. A number of internal and external factors decide the cost of variable interest rate.
• Fixed Rate Mortgage– A fixed rate means that the interest rate is fixed for a specified period, usually between 1 and 5 years. A fixed rate mortgage tells you exactly how much your repayment will be over the agreed period.
• Comparison Rate– A Comparison rate appears alongside the advertised interest rate with all home loans. A Comparison Rate is a comparative indication of the overall cost of servicing a mortgage once all the fees and charges have been considered.

To conclude, the interest on your home is calculated daily but charged monthly. A mortgage calculator from Your Finance Adviser will  give you an indication of how much interest you are likely to pay during the term of the loan.