Mortgage & Loan Calculator

How Australian home loans work

Most Australian home loans are variable-rate, moving when the lender changes its rates. Fixed rates are typically offered for a few years before rolling to variable, and many borrowers split a loan so part is fixed and part variable. This calculator models one rate for the whole term, so re-run it at the revert rate to see what happens after a fixed period.

Two features change the maths more than people expect. An offset account is a transaction account linked to the loan: every dollar in it is subtracted from the balance before interest is charged, so savings sitting there work like an overpayment you can still spend. Redraw lets you take back extra repayments you've made. Both are usually tied to variable loans.

You can usually choose weekly, fortnightly or monthly repayments. Paying half the monthly amount every fortnight gives 26 half-payments a year — the equivalent of 13 monthly payments instead of 12 — which shortens the loan. With a deposit under 20% of the property value (a loan-to-value ratio above 80%), lenders generally charge lenders mortgage insurance (LMI), a premium that protects the lender.

Lenders advertise a comparison rate alongside the headline rate. It folds in most fees, so it's the better number for comparing loans like for like.

How loan payments work

A standard repayment mortgage or loan is fully amortizing: you pay the same amount every month, and by the final payment the loan is paid off completely. Each payment covers the interest accrued on the current balance, and whatever is left reduces the principal.

The formula behind it is:

M = P × [ r(1 + r)ⁿ ] / [ (1 + r)ⁿ − 1 ]

where M is the monthly payment, P is the principal, r is the monthly interest rate (annual rate divided by 12), and n is the number of monthly payments. If the rate is zero, the payment is simply the principal divided by the number of months.

Worked example

Suppose you borrow $600,000 at 6% over 30 years — an illustrative loan for Australia, not a rate quote. The monthly rate is 6% ÷ 12 ≈ 0.5000%, and there are 360 payments. The formula gives a monthly payment of about $3,597. That single figure is where every comparison below starts.

What does 30 years of interest actually cost?

The monthly payment is what you qualify on; the total interest is what the loan costs you. They point in opposite directions, and the same $600,000 at 6% makes the point plainly:

• 30-year term: about $3,597 a month, roughly $1,295,029 paid in total — $695,029 of interest.
• 20-year term: about $4,299 a month, roughly $1,031,661 paid in total — $431,661 of interest.

A payment 19% higher saves $263,368 of interest. That trade — monthly cash flow against lifetime cost — is the single biggest decision in the whole mortgage, and it is the one the year-by-year breakdown above is there to make visible. Expand it and look at the first year: on the 30-year loan, only about $7,368 of your first twelve payments touches the principal.

How much does overpaying save?

Put an amount in the Monthly overpayment field. It is added to every payment and goes straight off the balance, so each later month is charged interest on a smaller sum. Your contractual payment doesn't change; the loan simply ends sooner.

On the $600,000 example, an extra $300 a month takes total interest from $695,029 to $547,614 — a saving of about $147,415, with the loan cleared 5 years 5 months early (24 years 7 months instead of 30 years).

Variable-rate Australian loans usually allow unlimited extra repayments, and an offset account achieves the same saving while keeping the money accessible. Fixed-rate loans often cap extra repayments and charge break costs beyond the cap.

Before committing spare cash to the mortgage, it's worth pricing the alternative: the same $300 a month invested instead is the comparison that decides it. Roughly, overpaying wins when your mortgage rate beats the return you realistically expect after tax; investing wins when it doesn't. At 6% that is close enough to be worth calculating rather than assuming.

Can this tell me what I can afford?

It answers the question from the other end — it tells you what a given loan costs per month, not what loan your income supports. Either way, start with what your pay leaves after income tax and the Medicare levy, decide what share of that you're prepared to commit to housing, then raise the loan amount here until the payment hits that ceiling.

Leave room when you do it. The payment shown here is principal and interest only; in Australia you also pay council rates, strata levies for units, home insurance, and lenders mortgage insurance (LMI) if your deposit is under 20%. A payment that exactly fills your budget on this page is a payment you can't afford.

Tips for Australia

• Remember the extras. This shows principal and interest only — council rates, strata levies for units, home insurance, and lenders mortgage insurance (LMI) if your deposit is under 20% come on top.
• Model fortnightly repayments. Add one month's repayment spread across the year as an overpayment above to see roughly what switching saves.
• Count your offset balance as an overpayment. Savings kept in an offset account cut interest the same way.
• Compare comparison rates. The headline rate leaves out fees that the comparison rate includes.

Monthly payment on $600,000, by rate and term

Principal and interest only, repayment loan, fixed rate for the whole term. Illustrative rates, not quotes.