 # How is home loan interest calculated?

Home loan interest is calculated by using a daily interest rate multiplied by the amount owing every day for a month, then summed up at the end. For those interested the equation and a worked example is provided below. Otherwise there are plenty of calculators online.

The following is a simplified version and is not 100% accurate, for absolute accuracy please observe the calculations and example at the bottom of the page.

I=PRN, where Iis interest, Pis principal or amount owing, Ris rate or interest rate divided by 12, Nis the number of months.

E.g. Imagine you have a home loan with a bank. You currently owe the bank \$500,000. The interest rate on your home loan is 2.50% p.a. compounding daily. The interest you repay each month is:

I=PRN=\$500,000 × 2.5%/12 × 1=\$1041.67

Home loan interest is not as simple a calculation as one might expect. You can check out this simple calculator here for an estimate on your interest(insert calculator)

To calculate interest:

\$interest =P(1+i/n)n-P

The principal (amount owing) × ((1+interest rate/number of days in the month)^number of days in the month) – principal.

E.g. Imagine you have a home loan with a bank. You currently owe the bank \$500,000. The interest rate on your home loan is 2.50% p.a. compounding daily. The interest you repay each month is:

\$interest = \$500,000(1+2.50%/31)31-\$500,000 = \$12,652.39 (for January, March, May, July, August, October, December)

\$interest = \$500,000(1+2.50%/30)30-\$500,000 = \$12,652.22 (for April, June, September and November)

\$interest = \$500,000(1+2.50%/28)28-\$500,000 = \$12,651.84 (for February)
Note: that the number of days in each month changes and hence so does the ‘n’ value.