Beat the Bank: How Your Home Loan Interest is Calculated (and How to Pay Less)

Your home loan interest can feel like a mysterious, complex beast that silently eats away at your finances. But understanding how it's calculated is the first step to taming it and saving yourself a fortune over the life of your loan.

This simple guide will show you how the banks calculate your interest, and more importantly, how you can beat them at their own game.

The Basics: Calculated Daily, Charged Monthly

The most important thing to know is that on most variable rate home loans, the interest is not calculated once a month—it's calculated on your outstanding loan balance every single day.

At the end of the month, all those small, daily interest charges are added together and included in your monthly repayment.

Let's look at a simple example:

• Your Loan Balance is: $500,000
• Your Interest Rate is: 6.00% p.a.
• Your daily interest rate is: 6.00% ÷ 365 days = 0.0164%
• The interest charge for Day 1 is: $500,000 x 0.0164% = $82.19

The bank does this calculation every day of the month. This reveals the secret to saving thousands: the lower your loan balance is on any given day, the less interest you pay.

Your Toolkit for Paying Less Interest

Knowing that interest is calculated daily, you now have the power to reduce it. Here are the four most effective strategies:

1. The Power of the Offset AccountThis is the ultimate weapon for saving interest. A 100% offset account is a transaction account linked to your mortgage. The money you keep in this account is 'offset' against your loan balance. So, if you have $50,000 in your offset, the bank only calculates interest on $450,000 of your $500,000 loan. That money is working to reduce your interest bill every single day, while still being 100% available for you to use.

2. Make Extra RepaymentsEvery extra dollar you pay into your mortgage—no matter how small—reduces the principal balance immediately. This means from the very next day, the daily interest calculation is based on a smaller amount. These small contributions compound into massive savings over time.

3. Pay Fortnightly Instead of MonthlyBy switching your repayments from monthly to fortnightly (and paying half the monthly amount), you will make 26 fortnightly payments a year. This equals 13 monthly repayments, meaning you make one extra full repayment each year without even noticing it. This simple trick can shave years off your loan.

4. Secure a Lower Interest RateThe simplest strategy of all is to have a lower rate in the first place. If you haven't reviewed your home loan in the last 12 months, you are almost certainly paying more than you need to. A quick, free review with us could find you a much more competitive rate, reducing your daily interest charges from day one.

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