Do You Pay Interest On A First Mortgage?
Understanding how a first mortgage works is crucial in preparing for home ownership. Whether you’re purchasing your first property or just researching the process, knowing how interest is charged and how it impacts your repayments can make all the difference when choosing the right home loan.
Overview:
Do You Pay Interest On A First Mortgage?
When you take out your first mortgage, interest will be charged as part of your regular repayments. Interest is the amount you pay to borrow money. In Australia, interest rates can be fixed or variable. The interest charge is a percentage of the total amount owing, calculated monthly.
For example, if your mortgage amount owing is $400,000, and the interest rate is 4%, the interest charged for the month will be approximately $1,300.
As you pay down the mortgage, the interest you pay each month will decrease as the amount owing decreases.
If you have a mortgage with a variable interest rate, the interest rate may fluctuate when the Reserve Bank of Australia adjusts the cash rate. A fixed interest rate will stay the same for the fixed period, usually several years.
How Do Interest Payments Work?
Every mortgage payment can be divided into two key components: the principal (the amount owing) and the interest (the cost of borrowing that money). Interest is calculated daily on the remaining loan balance and paid monthly as part of your regular repayments.
First mortgages typically follow one of two repayment structures. With a principal and interest loan, each repayment reduces the loan balance while also covering the interest charged. Alternatively, some borrowers may choose an interest-only period, where repayments cover only the interest for a limited time, however, this often results in higher total costs over the life of the loan.
How Much Interest Will You Pay?
Multiple different factors will determine how much interest you will pay on your first mortgage, including:
The loan amount you borrow: The more you borrow, the more interest you will repay by the end of your loan.
Your interest rate: The higher your interest rate, the more interest you will repay with each instalment.
The length of the loan term (25 years or 30 years comparison): The shorter the length of your loan, the higher the repayments, but you will pay less total interest. The higher the length of your loan, the lower your repayments, but you will pay more total interest. Here is a breakdown of how the length of your loan can impact how much interest you will pay.
| Loan Amount | Interest Rate | Loan Term | Monthly Repayment | Total Interest Paid |
|---|---|---|---|---|
| $500,000 | 6.00% p.a | 25 Years | $3,221 | $466,350 |
| $500,000 | 6.00% p.a | 30 Years | $2,998 | $579,000 |
Can You Reduce The Amount Of Interest You Pay?
If you’re looking to save over the life of your loan, consider the following strategies.
Extra repayments: Making extra repayments is a fantastic way to reduce the amount of total interest you are paying by reducing the length of your loan. The table below shows the difference that adding an extra $400 a month ($100 a week) can make on the total interest paid.
| Loan Amount | Interest Rate | Loan Term | Monthly Repayment With Extra Repayment | Total Years Saved | Total Interest Paid | Total Interest Saved |
|---|---|---|---|---|---|---|
| $500,000 | 6.00% p.a | 25 Years | $3,621 | 5 years, 7 Months | $361,426 | $104,924 |
| $500,000 | 6.00% p.a | 30 Years | $3,398 | 7 years, 5 Months | $435,612 | $143,388 |
Fortnightly payments: Interest payments are typically calculated at the end of the month. Switching to fortnightly payments is an easy way to get your repayments in before the interest is calculated, which over the length of your loan can save you money.
Offset accounts: An offset account works like a regular transaction account, but the balance is offset against your loan. This can reduce the loan amount used to calculate interest, saving you money while keeping your funds accessible.
Compare rates: It is important to stay on top of any interest rate changes and review whether your bank has applied the interest rate changes. Reviewing your loan regularly allows you to refinance or renegotiate if a better deal becomes available. Even small rate reductions can lead to thousands of dollars in savings over time.
Get Your First Mortgage With Broken Hill Bank
Getting your first mortgage doesn’t need to feel overwhelming. At Broken Hill Bank, we offer competitive rates, flexible repayment options, and a local team that understands the unique needs of our regional community.
If you have any additional questions or want tailored first home buyer support, please do not hesitate to contact our expert team today.
Frequently Asked Questions
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When you begin repaying your mortgage, a larger portion of your repayments typically goes toward interest rather than the principal. This is because interest is calculated daily on the remaining loan balance. Over time, as your loan balance decreases, more of each repayment begins to reduce the principal, and less goes toward interest. This is especially true for standard principal and interest loans.
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The amount of interest that you would pay on a $100,000 loan with a 7% interest rate depends on the loan term and repayment structure. For example:
On a 30-year loan, the monthly repayments would be around $665, and the total interest paid would be $139,508.
On a 25-year loan, the monthly repayments would be around $706, with the total interest paid around $111,718.
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To pay off a $400,000 mortgage in 5 years, you would need to make significantly higher repayments than the minimum required repayment. At an interest rate of 6.00% p.a, you would need to pay approximately $7,730 per month in principal and interest.