Whether you’re buying your first home or a first-time property investor, there are many things you will need to learn. One of which is understanding how your mortgage or home loan repayments are calculated. In this blog post, we’ll walk you through some factors that make up the average borrower’s mortgage repayment to ensure you understand exactly what you’re getting into when signing the dotted line.

What is a home loan repayment?

Home loan repayments, also known as mortgage repayments, refer to the regular payments, typically monthly, you make to your lender to pay off your home loan over a specified period, typically ranging from 25 to 30 years. These repayments usually consist of two components: the principal (the amount you are borrowing) and the interest (the cost of borrowing the money). Depending on your loan structure, your repayments may be interest-only or a combination of both principal and interest.

Now that we understand the definition let’s jump into the factors that make up your home loan repayments.

Six factors that influence mortgage repayments

As no two borrowers are after the same loan, this means their mortgage repayments will also vary. When calculating mortgage repayments, your lender will consider the following six factors:

• The loan amount (principal) — This is the total amount borrowed from the lender, also known as the principal. The larger the loan, the higher your repayments will be.
• Interest rate — The interest rate is the cost of borrowing money, expressed as a percentage of the loan amount. In Australia, interest rates can be fixed, variable or a combination of the two, known as a split rate. With a fixed interest rate, the rate remains “locked in” for a set period, providing certainty in your repayment amounts. A variable rate can fluctuate based on changes in the market, which can lead to variations in your repayment amounts. As the name suggests, a split interest rate combines a fixed rate’s security and a variable rate’s flexibility by allowing you to have two loans — one with a fixed interest rate and another with a variable interest rate.
• Loan term — The loan term is the period you agree to repay the loan, typically 25 – 30 years. A longer loan term will result in lower monthly repayments, but you’ll pay more in interest over the life of the loan. On the other hand, a shorter loan term will increase your monthly repayments but reduce the total interest paid.
• Repayment frequency — Depending on the lender, you may be able to choose to make home loan repayments on a weekly, fortnightly or monthly basis. Making frequent payments can help reduce the overall interest paid over the loan’s term. This is because interest is calculated daily and charged monthly, so you will pay down the principal more quickly.
• Repayment type — This refers to whether you make principal and interest (P&I) repayments or interest-only (IO) repayments. P&I repayments are the most common, as each payment gradually reduces the loan balance over time. IO repayments only contribute toward the interest on the loan for a set period (usually up to five years).
• Lender’s Mortgage Insurance (LMI) — If you apply for a home loan with a deposit below 20% of the property’s value plus costs, you will need to pay LMI, which protects the lender if you default on the loan. LMI can be added to your loan amount, increasing your repayments slightly.

How are mortgage repayments calculated in Australia?

Mortgage repayments are typically calculated using a standard formula, considering the loan amount, interest rate and loan term. This process is known as “amortisation,” where your home loan principal is broken down into manageable payments over your loan term. To do this, lenders use specialised mortgage repayment calculators.

For a typical principal and interest mortgage, your repayments consist of:

• Principal repayments
• Interest charges
• Fees

• Principal repayment

The principal repayment is a portion of the original loan amount. For example, if you borrowed $500,000, your principal is $500,000. This amount is spread across the loan term. For instance, a 25-year loan will divide the principal over 300 months, resulting in 300 individual principal repayments.

• Interest repayments

Interest is calculated daily by your lender and added to your mortgage repayment. At the end of each business day, the lender multiplies your remaining principal by the loan’s interest rate and then divides the result by 365 days to calculate the daily interest amount.

With a P&I Loan, the total repayment you make is a combination of these principal and interest portions. During the course of your loan and as you make repayments, the total repayment amount remains the same. However, the portion of each payment going towards the principal increases while the interest portion decreases.

With an IO loan, your repayments for the initial period will only consist of the interest portion. In saying this, if you have a 25-year loan term with two years IO, your repayments after the IO period will then be a combination of both; however, the principal portion will be divided over 23 years instead, so it will be higher.

Additional considerations for mortgage repayment calculations

These days, home loans come with additional extras to help borrowers manage their repayments more easily and grant them more flexibility over how they manage their cash. Let’s explore some of these loan features in greater detail:

• Extra repayments — Making extra repayments beyond the required amount can reduce your principal faster, saving you interest and helping you repay the loan sooner. All variable loans allow for uncapped extra repayments. However, it’s wise to check your loan agreement for any restrictions if you have a fixed loan.
• Offset accounts — An offset account is a transaction account linked to your mortgage. The balance in this account offsets the loan balance, reducing the interest payable. For example, if you have a $20,000 balance in your offset account and a $500,000 mortgage, you’ll only be charged interest on $480,000. Typically, there is either a monthly or annual fee to have an offset account, so it’s important to know this may not be beneficial for your situation. Generally speaking, and as a rule of thumb, if you consistently have less than $8,000 in your offset account, you are likely not getting the benefits of having this.
• Redraw facility — Some loans offer a redraw facility, allowing you to access any extra repayments you’ve made. This feature provides flexibility but might come with fees or restrictions when withdrawing funds, so it’s important to understand the terms.

It’s important to note that while all of these options are available on variable loans (with an additional fee for an offset account), there are restrictions with fixed loans. Your extra repayments, if offered, are generally capped at around $10,000 – $20,000 per annum. Only a very small handful of lenders offer redraw and offset accounts during the fixed period.

Take on the property market with confidence with Shore Financial

When navigating the home loan market, having a trusted partner can make all the difference. Shore Financial is the #1 independent mortgage brokerage in Australia, offering expert guidance and tailored solutions at every step of the way.

Over the years, we’ve worked with hundreds of clients, from first-time homebuyers to refinancers, matching them with the most competitive loan based on their needs. We’ll even provide a free annual loan review to ensure you’re still on the best loan.

Schedule a consultation with our team by calling 1300 416 700 or filling out our online enquiry form.

FAQs

What happens if I miss a home loan repayment?

If you miss a home loan repayment, this is known as a mortgage default. The lender will ask that you make the repayment as soon as possible and may charge you a late payment fee. This will also likely be recorded on your credit file as it shows your repayment history from the last two years. So long as you remain consistent and timely with your mortgage repayments, there is no risk to your property. However, if you know you cannot make a repayment on time, it is always best to contact your lender as early as possible before the payment is due to discuss your options.

Can I make extra payments on my mortgage?

This will depend on your lender and your loan type. Many lenders allow borrowers to make additional repayments to their loan with or without penalty, so ensure you read the fine print of your loan agreement. If extra repayments are an important loan feature for you, discuss this with your mortgage broker to ensure you have a suitable loan structure for your needs.

Can I change my mortgage repayment schedule?

Yes, many lenders allow borrowers to edit their mortgage repayment schedule to better suit their lifestyle. Simply contact your lender to understand their process.

What happens if I pay off my mortgage early?

All loans have a set discharge fee, roughly around $300 on average — it’s essentially an admin fee for them to end your loan agreement.

If you have a variable loan, lenders are not allowed to charge you any additional fees for repaying your loan early, aside from any interest that has accrued between your previous repayment and your final one (due to interest being calculated daily, if you finalise your loan on day 28 of the month, for example, you will need to repay 28 days of interest on top of the remaining principal balance).

If you have a fixed home loan, you may be charged an additional break-cost fee when repaying your loan early. This is calculated based on your fixed interest rate, what your lender is currently offering for the same product, how long your fixed period has remaining and the initial ‘cost of funding’ for the Lender. Due to these factors, it is impossible to know what this cost may be in the future, so you will need to request the break cost fee from your lender directly when you are looking to close your loan.

How do home loan repayments affect my credit score?

This will depend on whether you make your mortgage repayments on time, as late payments or defaults can negatively impact your credit score. Your credit file shows the last 24 months of repayment history for all credit facilities with the majority of lenders, so it’s best to stay on top of your repayments as much as possible. A poor or less-than-average credit score or negative repayment history can prevent you from future credit applications, such as refinancing your home loan, purchasing an additional property or taking out a credit card or personal loan.