It’s a great time to buy property. And there are more systems in place than ever before to help you snag mortgages in other countries – that includes the US, Spain, New Zealand, and Australia. But the journey doesn’t end with finding your dream home.
There are costs to consider. Lots of them. Assuming you’re taking out a loan to buy your property, one of the most significant costs you’ll face is interest. That can be a scary word for many, but it doesn’t have to be.
Understanding exactly how home loan interest works can make a big difference to your finances. Whether you’re asking, “How much interest will I pay on my loan?” or “What percentage of income should my mortgage be?”, having a clear grasp of the relevant calculations can save you money and stress.
So if it’s time for you to start sitting down and doing some sums, stick around. You’re in the right place. Today, we’re going to explore everything you need to know, including how to calculate home loan interest, principal and interest loans, and average mortgage repayments. Read on!
What is Home Loan Interest?
If you’re reading this, you probably already know what home loan interest is. For those who don’t, however – or those who don’t fully understand it – here’s a quick explanation:
When you take out a loan, the lender, usually a bank, has to make money from the transaction. They do this by adding ‘home loan interest’ (or ‘mortgage interest rate’) to the loan. In essence, it’s an extra charge you’ll have to pay for borrowing the money.
Mortgage interest rate is a percentage of the borrowed amount. However, there are different types of interest, including:
- Fixed rate: Your interest rate doesn’t change for the ‘fixed’ period of time.
- Variable rate: The interest rate can change based on underlying economic factors.
What Is the Formula for Calculating Interest on a Home Loan?
You’ll be glad to hear the formula for calculating interest on a home loan is actually relatively straightforward. That is, if the interest agreement is straightforward. There are cases – such as with compound interest – when these calculations can vary. But for simple interest, the formula is:
A = P(1 + rt)
Where:
- A is the total accrued amount.
- P is Principal, the original loan amount.
- R is Rate, the annual interest rate expressed as a decimal.
- T is Time, the loan term in years.
So what does this actually mean? Well, here’s an example: let’s say you take out a loan of $300,000. You agree to a 4% annual interest rate for 30 years. Your interest rate calculation for one year would be:
$12,000.
Remember, though, that this is the interest for the first year only; as you repay the principal, the interest amount typically decreases.
How Do You Calculate Monthly Interest on a Mortgage?
Okay, so we’ve covered annual interest. What about monthly? For many people, who get paid monthly, figuring out their monthly interest payments helps to budget more effectively. So let’s find out!
To calculate monthly interest, divide the annual interest rate by 12 and apply it to the remaining loan balance. For example:
- Determine the monthly interest rate: If your annual rate is 4%, the monthly rate is 4% ÷ 12 = 0.333% (or 0.00333 as a decimal).
- Apply the rate to the remaining loan balance: If your current loan balance is $300,000, the monthly interest is:
$300,999.
This means you would pay $999 in interest for that month.
How Do I Calculate Interest on a Loan?
Interest calculations aren’t always a case of punching a few numbers into a calculator and getting an answer. It depends on a variety of factors, as well as what type of loan you’ve signed up for. For principal and interest loans, part of your monthly payment goes toward reducing the principal, and the rest covers interest. The amount allocated to interest decreases over time as the principal balance reduces.
For loans with a line of credit, interest is usually calculated daily and charged monthly. Use the following formula to calculate daily interest:
- Daily Interest Rate = Annual Interest Rate ÷ 365 (or 360 in some cases).
To go back to our earlier example, that would be about $32.88 per day.
For clarity, let’s try a different example. If you have an outstanding balance of $10,000 at an annual rate of 5%, your daily interest is:
- Daily Interest = 10,000 × 0.05 ÷ 365 ≈ 1.37
How Is Interest Calculated Monthly?
Calculating your daily payments can be helpful for detailed budgeting. However, most mortgages use an amortization schedule to calculate monthly payments. This divides the total loan amount into equal monthly payments over the loan term – combining principal and interest. The formula to calculate monthly mortgage payments is:
- M = P×r×(1+r)n ÷ (1+r)n−1
Where:
- M is the monthly payment.
- P is the loan principal.
- r is the monthly interest rate.
- n is the total number of payments (loan term in months).
How to Find the Principal Amount of a Loan
Of course, you can do these calculations the other way around, too. If for whatever reason you need to find the principal amount of a loan, there’s a simple formula you can follow to find it. Simply use the amortization formula rearranged for principal:
- P = M × (1−(1+r)−n) ÷ r
Where:
- P = Loan principal (the total loan amount)
- M = Monthly payment
- r = Monthly interest rate (annual interest rate divided by 12)
- n = Total number of payments (loan term in years multiplied by 12)
For instance, if your monthly payment is $1,432, with a 4% annual interest rate and a 30-year term:
- P = 1,432 × (1−(1+0.003333)−360) ÷ 0.003333
The result is $299,948.50 – or roughly $300,000.
What Percentage of Income Should a Mortgage Be?
Let’s set the math aside for a moment and tackle a simpler question: what percentage of income should you be willing to pay on a mortgage? After all, this will determine how much money you have each month for other essentials.
Financial experts often recommend that your monthly mortgage payment should not exceed 28% of your gross monthly income. This ensures you can comfortably manage repayments alongside other expenses.
For example, if your gross monthly income is $5,000, your maximum mortgage payment should be $1,400.
Other Ways to Calculate your Home Loan Interest
Hopefully, we’ve cleared a few things up and got you well on your way to budgeting more effectively with a mortgage. However, you could be left feeling a little overwhelmed by the math involved. Don’t forget there are online calculators that can help you with this – just make sure you choose the right one!
There are also professional services that can help you with mortgage and finance processes. Upscore’s FinancePassport is the one-stop shop for accessing mortgages overseas. So if you’ve got your heart set on moving abroad, get started on Upscore to make the process as smooth and stress-free as possible.
