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# How do banks calculate interest on home loans?

If you find home loan interest calculations mysterious, you’ll be pleased to know they’re actually pretty straightforward. Best of all, calculating how much interest you’re paying at any given time is a walk in the park.

## How interest charges are calculated

Your total home loan interest costs will depend on a number of factors, including:

• the amount you’ve borrowed
• your interest rates over time
• the term of the loan
• any offset accounts

In most cases interest is calculated daily and is based on the outstanding balance of your loan. This doesn’t include any money you may have in a linked offset account if you have one included with your home loan package.

If you want to get an idea of how much your interest charge is on a particular day, all you have to do is multiply the remainder of your outstanding loan balance (minus any offset funds) by your annual interest rate then divide it by 365.

## How to work out interest on your home loan

You might be surprised at just how easy working out interest costs can be.

If your hypothetical loan balance of \$460,000 carried a standard variable interest rate of 2.29% per annum and you didn’t have an offset account, calculating your daily interest charge is as simple as this:

\$460,000 x 0.0229 / 365 = \$28.86 interest per day

If your repayments are monthly and you didn’t touch your loan during the month (such as by redrawing, for example), working out your monthly interest charge is simple. You just need to multiply your daily interest charge from above by the number days in the month. In the case of January, it’d look like this:

\$28.86 x 31 = \$894.69 interest for January

Of course, your standard variable interest rate is subject to change at any time, so the amount of interest charged on your loan could change during the month. Your actual repayment amounts will also be different to the amount of interest charged. They’ll include things like principal, interest and fees and are calculated according to factors unique to your loan.

But despite only taking a few seconds, working out your interest costs can shed light on your loan in surprising ways.

## Why calculating interest charges yourself can be handy

Knowing how interest is calculated can equip you with valuable knowledge about your loan.

For example, you might recognise that more frequent repayments can help you save. This is because weekly or fortnightly repayments reduce the amount outstanding on your loan more frequently than monthly repayments.

It’s also beneficial to know how interest is paid over the life of your loan. When you first start making repayments, you might pay more interest than you expect. It’s helpful to know that the more you pay off your mortgage principal (that is, the amount you owe the bank), the less interest you pay if your rate remains the same.

## Using home loan calculators to work out interest charges

If you’re looking for an even simpler way to calculate interest charges, home loan calculators are the way to go. Suncorp Bank’s calculators can help you work out interest charges whether you’re:

• investing in a property
• switching to Suncorp Bank from another lender

Calculators can be a great way to find out a wide variety of loan-related information. You can find out:

These are just the tip of the iceberg, though. Make sure to check out our other calculators to find other ways you could potentially save.

## The home loan interest rates you need to know

Home loans are usually offered with either variable or fixed interest rate options. In both cases interest is usually still calculated on a daily basis.

• Variable rates can change depending on the bank’s lending costs and other factors. In Australia, rate fluctuations often relate to changes in the interest rate targets set by the Reserve Bank of Australia.
• Fixed rates remain constant for an agreed time period at the start of your loan term (typically between one and five years). If you choose a fixed rate home loan, it’ll automatically switch to a variable rate after the fixed rate period.

Understanding how different types of home loans work, and understanding their features and options, can help you choose which is likely to work best for you.

## Get a better understanding of interest rates

Talk to a home lending expert

Published 25 August 2022

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Home Loan, Personal and Business Banking products are issued by Suncorp Bank (Norfina Limited ABN 66 010 831 722 AFSL No 229882 Australian Credit Licence 229882) to approved applicants only. Eligibility criteria, conditions, fees and charges apply and are available on request. Please read the relevant Product Information Document and terms and conditions before making any decisions about whether to acquire a product.

The information is intended to be of general nature only. We do not accept any legal responsibility for any loss incurred as a result of reliance upon it – please make your own enquiries.