Our Lenders

Home Loan Information

Like This Site

How Home Loan Interest is Calculated

Understanding How Interest is Calculated

Buying a house is no joke, there are many things you need to know. Arm yourself with knowledge, ask, read and learn. You know that when you borrow money on a home loan the bank is going to charge you interest on the amount of the loan. For many of us that is a sore point at the moment as the interest rate has increased steadily over the last few years. The effect of rising interest is that it increases your monthly repayments and today you will be paying a lot more than three years ago, even though you did not borrow additional money.

What method does the bank use when calculating the interest on your home loan? Firstly, there are different methods of interest calculation. On some accounts the interest calculation is done on the minimum monthly balance or monthly interest is paid; on home loans interest is calculated on the daily balance and capitalized monthly.

When you buy a car and choose to pay it off over five years, your contract will show the capital you borrowed plus the interest calculated for the full term, i.e. five years. If you take out a home loan for twenty years, the interest is not calculated on the twenty years and added to the amount you borrow—if that was the case we would probably run away if we saw upfront how much it is going to cost us!

As interest is calculated on a daily balance, no two months interest will be the same, as some months have 30 days and others 31 days, then there is February with 28 days. Also, your outstanding balance change every month. A number of transactions take place on your home loan account every month: Interest is added to the capital once a month, you are charged a monthly administration fee and you make a repayment every month. Therefore, the balance on the account can change a couple of times a month.

An example:

You borrow R200 000 on the 1 January 2008 at an interest rate of 15.5%. January has 31 days:

R200 000 X 15.5% / 365 X 31 days = R2 632.88 interest for the month of January.

Except…it’s not that simple. On the 20th of January your monthly debit order from your current account to your home loan is activated, let’s say for R5 000. Therefore on the 20th of the month your balance is now R195 000.

The calculations now change as follows:

From the Ist of January to the 19th interest will be calculated on R200 000 =

R200 000 X 15.5% / 365 X 19 days = R1613.70.

On the 20th your balance was R195 000 and it does not change for the remainder of the month, 12 days left.

R195 000 X 15.5% / 365 X 12 = R993.70

On the 1st of February the interest for the previous month is capitalized i.e. added to your account. The amount will be R1 613.70 + R993.70 = R2 607.40. Compare this to the amount of R2 632.88 you would have been charged if you only made the R5 000 payment on the 31st of the month and you see that you are actually charged R25.48 less.

On the 1st February your balance is now R197 607.40 and the process repeats itself. The conclusion we make from the calculations is that the sooner you make your repayment in the month, the more you will save on interest. Also, any additional money you pay into your bond will result in you paying off your bond much faster.

If you want to see the full effect of what we have looked at above you can use one the handy calculator tools on the internet. Look at any of the bank’s or home loan sites and work out how much you will save by paying in more than your specified repayment. Even a R100 extra a month will make a huge difference.

Your aim should be to retire debt-free.

Subscribe to our Newsletter

Online Application

Interest Rates

Testimonial