Understanding How Mortgage Repayments are Calculated?
When it comes to home loans, understanding how your mortgage repayments are calculated can help you make more informed financial decisions. Whether you’re a first home buyer, refinancing, or reviewing your investment loan strategy, it’s important to know the difference between principal and interest (P&I) repayments and interest-only repayments — and how lenders determine your minimum required repayment.
As experienced mortgage brokers in Melbourne, we regularly help clients navigate these differences. Here’s a clear breakdown of how repayments work and what you need to be aware of when managing your loan.
Principal & Interest (P&I) Repayments
When your loan is set to principal and interest (P&I) repayments, your regular repayment covers two parts:
Interest – the cost of borrowing money
Principal – the actual loan amount being repaid
What many people don’t realise is that P&I repayments are calculated based on your original loan limit, not your current loan balance.
Example:
If you have a $600,000 loan limit with P&I repayments over 30 years, your monthly repayments are calculated as if you owe the full $600,000 — even if you’ve already made extra repayments and reduced your balance to, say, $550,000.
This means that paying down the loan with extra funds won’t reduce your minimum monthly repayment unless you request a permanent principal reduction from your lender. This process reduces the formal loan limit but also removes access to any redraw — meaning those extra repayments can no longer be withdrawn.
If maintaining redraw flexibility is important to you, be cautious about requesting a permanent reduction.
Interest-Only Repayments
During an interest-only period, your repayments cover only the interest charged on the outstanding loan balance — not the principal.
Interest-only repayments are calculated on the actual loan balance, not the original loan limit. So if you’ve made extra repayments and reduced your balance, your interest charges (and thus your repayments) will also reduce.
Example:
With a $600,000 loan on interest-only terms, if your current balance is $550,000, your interest is only calculated on that $550,000. So the more you pay down, the less interest you pay. However, because you're not repaying the principal, the loan term doesn't reduce during this period unless you switch to P&I or make additional repayments.
Key Takeaways for Borrowers
P&I repayments are calculated on your loan limit, not your balance. Your minimum repayment won’t change unless you formally reduce the loan limit.
Reducing your loan balance under a P&I loan gives you more equity, but won’t lower your repayment unless you opt for a permanent principal reduction, which also removes redraw access.
Interest-only repayments are calculated on the outstanding balance, so extra repayments will directly reduce your interest costs.
If you’re unsure which repayment type is right for your situation, speak to a trusted mortgage broker in Melbourne for tailored advice.
Need Help Understanding Your Home Loan?
At Rosh Partners, we help clients across Melbourne and the Mornington Peninsula make smarter mortgage decisions. Whether you’re considering a new loan, reviewing your existing structure, or need help understanding how repayments impact your finances, we’re here to help.
Contact us today to speak with a professional mortgage broker in Melbourne who understands the ins and outs of loan structures, redraws, and repayment strategies.
