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How to understand your mortgage repayments

Mark Bristow avatar
Mark Bristow
- 5 min read
How to understand your mortgage repayments

Disclaimer

This article is over two years old, last updated on April 8, 2022. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent home loans articles.

Whether you’re working out if you can afford a home loan, or if you already have a mortgage, it’s worth understanding exactly what goes into your mortgage repayments, so you can be confident that you’re getting value for money.

The basics of principal and interest repayments

When you apply for a mortgage, you borrow a sum of money – the principal – from a lender, to be paid back over an agreed length of time – the loan term. This term is often measured in decades (20 to 30 years is common), and repayments may be made monthly, fortnightly, or weekly.

In most cases, each mortgage repayment will consist of a small part of the mortgage principal owing, plus an interest charge. Over time you’ll slowly but surely pay off your mortgage principal, until it is fully repaid by the end of the loan term.

The exact amount of interest you’ll be charged on each repayment will be based on the lender’s interest rate, and the remaining principal owing. Lenders typically calculate your principal and interest mortgage repayments to stay consistent, with the ratio of principal to interest changing as you slowly pay off the loan. So while early on in your loan term your principal and interest repayments will consist mostly of interest charges, this will swing towards being mostly principal toward the end of your loan term.

EXAMPLE

Imagine you had a $500,000 mortgage with an interest rate of 3 per cent, to be repaid in monthly instalments over a 30 year term. 

According to the RateCity Mortgage Calculator, you’d be paying $2108.02 for each repayment. While  your first repayment will consist of repaying $858.02 of your loan principal and a $1,250.00 interest charge, the final repayment would consist of $2102.76 principal and just $5.26 interest.

How changing your loan can change your mortgage repayments

Small changes to your home loan can make a big difference to not only your regular mortgage repayments, but the total interest you’ll be charged on the mortgage.

Loan term

Choosing a longer loan term means your mortgage principal can be divided between a larger number of repayments, making each repayment smaller. However, because it will take longer to pay off your loan, you’ll likely end up paying more interest on your home loan in total.

The reverse is also true. Choosing a shorter loan term can make your regular repayments more expensive, as each one will consist of a larger percentage of your mortgage principal. However, because you’ll pay off your loan faster, you’ll likely be charged less total interest on your mortgage.  

EXAMPLE

In the previous example, where you’re repaying a $500,000 mortgage at 3 per cent interest over a 30 year term, making monthly repayments of $2108 would lead you paying $258,887 interest on the loan, for a total mortgage cost of $758,887.

Switching to a 25 year loan term would mean making monthly repayments of $2371 - $263 more. But over the 25 year term, you’d pay $211,317 in interest charges, for a total loan cost of $711,317 – a saving of $47,570 compared to the 30 year term.

Repayment frequency

Choosing fortnightly or weekly repayments may help some households sync up their mortgage repayments with their payroll cycle, but they may also help you pay off your loan a little faster, saving some money on interest over time.

There are two reasons for this. Firstly, with 26 fortnights in a year, you can effectively make 13 monthly repayments in a 12 month year, as not every month is exactly four weeks long. And the more frequently you can reduce your loan principal, the more you can shrink the interest you’re charged on this amount.

EXAMPLE

In the previous example, where you’re repaying a $500,000 mortgage at 3 per cent interest over a 30 year term, making monthly repayments of $2108 would lead you paying $258,887 interest on the loan, for a total mortgage cost of $758,887.

Switching to fortnightly repayments of $1054 could mean paying $224,492 total interest, or $724,492 in total for the loan – a saving of $34,395 compared to monthly repayments. 

Switching to weekly repayments of $527 could mean paying $224,283 total interest, or $724,283 in total for the loan – a saving of $34,604 compared to monthly repayments.

More mortgage options

It’s important to remember that all of the above calculations are hypothetical estimates for illustrative purposes only, and don’t take mortgage fees or changes to your interest rate over time into account. While you may be able to fix your home loan interest rate for up to five years and keep your repayments consistent, it’s likely that your repayments may change once your loan reverts to a variable rate.

You may also have the option to make interest-only repayments for a limited time, which can greatly reduce your monthly repayments, but slow your progress towards paying off your principal, resulting in higher long-term interest costs.

There are also other home loan options, features and benefits you could potentially use to pay off your mortgage faster and reduce your interest costs, such as making extra repayments, or using an offset account. You can learn more about these at RateCity, or you can contact a mortgage broker to walk you through how these features and benefits could work for you.  

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Product database updated 14 Apr, 2024

This article was reviewed by Personal Finance Editor Georgia Brown before it was published as part of RateCity's Fact Check process.