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One of the most important factors in choosing a home loan is the interest rate. Armed with the knowledge of how interest is calculated on your home loan, you'll be able to make better decisions when it comes to taking out a home loan.
Before you dive into the details of interest rate calculations, it's important to understand what an interest rate is.
Interest charged on home loans
How to calculate interest on home loans
How to use online interest rate calculators
In the context of home loans, interest is the money a lender charges you based on the amount of money borrowed. In other words, it's the cost of the loan.
For a home loan, the interest rate is usually a percentage of the total loan amount. The higher the interest rate, the more money you'll have to pay back on top of your original loan amount.
In Australia, the amount of interest charged on a home loan depends on a lot of things. For many banks, the Reserve Bank of Australia's (RBA) official cash rate is an important factor to consider when setting interest rates. The cash rate is reviewed regularly by the RBA but it doesn't change every time they meet.
When determining interest rates, we consider:
Let's say you have a variable rate home loan of $600,000 and your interest rate is 5.84% per year. You would use this calculation for daily interest:
$600,000 × 0.0584 / 365 = $96.00 interest per day
For monthly interest, you would then multiply this number by the number of days in the month. So for December, this would be:
$96.00 × 31 = $2,976.00 interest per month
It's important to note that this is a simplified example for demonstrative purposes.
Now that you understand the basics of how interest is calculated, a much more accurate way to calculate interest is to use an online calculator.
Interest rate calculators are handy tools for estimating interest charges and comparing different loan options. They can also help you understand the impact of making extra payments or changing the loan term. This way, you can plan your loan in a way that works best for your financial needs and goals.
Explore HSBC Home Loan Calculators
At HSBC, we offer both fixed and variable home loan interest rates. What you choose will depend on your financial circumstances and goals.
HSBC fixed rate loans are available from 1 to 5 years. Fixed rates allow you to lock in a rate for a set period. This will stay the same, regardless of factors that may cause a variable rate to change. It can be easier to budget if you know what your payments will be every month. And if you time it right, you can lock in a low interest rate, saving you money.
Possible downsides to fixed rates loans are:
Fixed rates are often higher than the variable rates that you might see advertised. This is because you are trading the flexibility of a variable rate for the certainty of knowing what your repayments will be for a set period of time. If interest rates go up, yours will stay the same.
Do you ever ask yourself, "Why is my mortgage interest different every month"? A rate that goes up and down with the market is called a variable interest rate. This is good for the borrower if rates drop. It can, however, make it hard to budget if your monthly payments fluctuate, too.
You'll usually have more options with a variable interest loan. Benefits include linking to an offset account and making extra payments. These features allow you to put money into your loan to save on interest.
Not sure which type of loan interest rate is best for you? Mix and match with a split home loan to get the most out of each type of interest rate. As with any home loan, there will be benefits and drawbacks. Do your research before deciding to ensure you get the best home loan for you.
The loan term, amount and interest rate aren't the only factors that will determine your interest charges. Here are 6 things you can do to make a significant impact on the rate you're offered.
If you already have a home loan with us, you can contact your Home Loan Manager or call us on 1300 308 008. Otherwise, you can fill in our online enquiry form to get a call back.
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This article is intended to provide general information of an educational nature only. This information should not be relied upon as financial product advice as it does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of the information to your own circumstances and seek independent legal and financial advice prior to making any investment choice. There are risks associated with any investment and this document is not intended to list all of them in respect to any particular investment opportunity. Prices, levels and indications contained in this document are illustrative only and may not represent future performance. HSBC does not warrant or represent the performance of any investment opportunity.
Disclaimer: Credit provided by HSBC Bank Australia ABN 48 006 434 162. AFSL/Australia Credit Licence 232595. Home Loan Terms, Personal Banking Booklet, Fees and Charges and lending criteria apply. This article does not take into account your personal or financial situation. Please consider a relevant Product Disclosure Statement, available at hsbc.com.au or by calling 1300 308 008 before making a decision about this product.
