How to Calculate Mortgage Interest on a Home Loan

To calculate mortgage interest, multiply the balance charged interest each day by the annual interest rate divided by the contract’s day-count denominator. Add those daily amounts across the interest period to get the charge. On a loan charged monthly, a longer month can cost more even when the rate hasn’t changed.

For a broker explaining a client’s statement, separate the interest charge from the scheduled repayment. Interest is the cost of the debt for that period. A principal-and-interest repayment also pays down some of the amount borrowed.

How Lenders Accrue Interest

Home loan interest accrues on the outstanding balance each day, with the accumulated amount charged at the frequency in the loan contract. The daily calculation uses the loan’s annual interest rate as a decimal.

Daily interest = balance charged interest x annual rate / day-count denominator.

The denominator converts the annual rate into a daily rate. Don’t automatically use 366 in a leap year: the contract decides which denominator applies.

Commonwealth Bank of Australia’s mortgage terms, effective 15 June 2026, specify daily interest on the outstanding balance in clause 6.1. They use the annual percentage rate divided by 365, including leap years. Clause 6.3 points to Item H of the client’s loan Schedule for the charging frequency.

Australia and New Zealand Banking Group Limited (ANZ) states, as at October 2026, that most ANZ home loans calculate interest daily and charge monthly. Its home loan interest explanation uses the unpaid daily balance and a 365-day denominator. Those named examples explain the method without making every loan’s charging terms identical.

Gather the contract and current statement before reconstructing a charge. You also need the rate notices and transactions for the interest period. Follow these steps with the client.

1. Find the contract clause headed interest calculation or equivalent. Record the denominator and the balance used, such as the daily closing balance.
2. Find the charging frequency and interest-period dates. Use the actual period covered by the charge, which can differ from a calendar month.
3. List every effective balance change and rate change. Include any linked offset balance where the loan permits an offset.
4. Calculate each day’s interest, then add the amounts for the complete period. Compare the total with the statement’s interest entry, separately from fees.

Daily accrual means the lender calculates each day’s cost. It doesn’t, by itself, mean the lender adds each day’s interest to the balance every day.

A Worked Example

A fictional $500,000 loan at a hypothetical 6% annual rate incurs $2,465.75 of interest over an unchanged 30-day balance period. This example uses a 365-day denominator and Australian-dollar amounts. The rate is illustrative, not a published loan offer.

Assume no offset, fees, arrears, redraw or rate changes during the period. The scheduled repayment occurs after the final day’s interest calculation. Keep full precision during the calculation and round the final charge to cents.

Calculation	Inputs	Result
Convert the annual percentage	6 / 100	0.06
Calculate one day’s interest	$500,000 x 0.06 / 365	$82.1917808
Add 30 unchanged days	$500,000 x 0.06 / 365 x 30	$2,465.75

Multiplying the rounded daily amount of $82.19 by 30 gives $2,465.70. Keeping full precision avoids that five-cent difference in this example. For a real statement, follow the lender’s rounding convention.

When the Balance Falls Mid-Month

An extra repayment reduces interest from the date it affects the balance used in the daily calculation. Change the fictional case by making a $10,000 extra repayment effective for day 16’s closing balance. The rate stays at 6%.

Period	Balance charged interest	Calculation	Interest before final rounding
Days 1 to 15	$500,000	$500,000 x 0.06 / 365 x 15	$1,232.876712
Days 16 to 30	$490,000	$490,000 x 0.06 / 365 x 15	$1,208.219178
Complete period	Two balance periods	Add both unrounded amounts	$2,441.095890

The rounded charge is $2,441.10, saving $24.65 against the unchanged-balance case. Using the final $490,000 balance for all 30 days would overstate the saving.

For a client statement that doesn’t match, first compare the interest-period dates and effective transaction dates. Split the calculation again wherever the rate changes. If the figures still differ, give the lender the dated balances and calculation and request an explanation of the specific difference.

From Interest to the Scheduled Repayment

A scheduled principal-and-interest repayment is set to repay the debt over the remaining term, including the interest incurred along the way. The calculation needs the balance, interest rate, payment frequency and number of payments left.

For an estimate with equal monthly periods, use the standard repayment formula.

Monthly repayment = P x r / (1 - (1 + r)^(-n)).

Here, P is the outstanding principal, r is the annual rate divided by 12 as a decimal, and n is the remaining number of monthly payments. For the fictional loan, assume 30 years remain, payments occur monthly and the 6% rate stays unchanged.

• P = $500,000.
• r = 0.06 / 12 = 0.005.
• n = 30 x 12 = 360 payments.
• Estimated monthly repayment = $2,997.75.

This equal-period formula estimates the repayment. Reconstruct the statement’s interest charge with actual days, as in the earlier example. The lender’s schedule sets the required repayment and includes its own calculation and rounding rules.

Moneysmart’s mortgage calculator also distinguishes repayment estimates from actual amounts. Its model assumes a constant rate and interest compounding at the selected repayment frequency.

How Much of an Early Repayment is Interest?

If the fictional loan pays $2,997.75 after the 30-day period, $2,465.75 covers interest and $532.00 reduces principal. Interest takes about 82% of this early payment. With no other entries, the balance becomes $499,468.00.

The equal-month estimate instead allocates $2,500.00 to interest in its first modelled period. That difference comes from using 6% / 12 instead of 30 actual days / 365. Use the daily charge when explaining an actual account entry.

For another 30-day period at the same rate, the lower $499,468.00 balance incurs $2,463.13 interest. The same $2,997.75 payment then pays $534.62 towards principal. As the debt falls, less interest accrues and more of a level payment reduces the debt.

The interest share falls over time, but it needn’t fall in every calendar month. A 31-day period on that lower balance incurs $2,545.23. Changes to rates or the loan term can also change the required repayment.

Keep paying the required amount while it applies. For broader household comparisons, see average mortgage repayments in Australia.

What Offset, Redraw and Extra Payments Change

An offset reduces the balance used to calculate interest, while an extra repayment reduces the loan balance itself. Redraw is access to eligible extra repayments already paid into the loan. Withdrawing that money increases the loan balance again.

Moneysmart’s offset account guide explains the difference between a separate linked transaction account and extra payments held in the loan. The loan terms determine access to redraw. A partial offset provides less interest reduction than a 100% offset.

Reset the fictional loan to its opening $500,000 balance. Compare each option independently over 30 days at 6%, with the change effective from the first day. Assume the lender permits the extra repayment without a charge and the offset is correctly linked with a 100% benefit.

Independent case	Loan balance	Balance charged interest	30-day interest	Saving against the baseline
Baseline	$500,000	$500,000	$2,465.75	$0.00
Keep $20,000 in the linked offset	$500,000	$480,000	$2,367.12	$98.63
Pay $20,000 extra into the loan	$480,000	$480,000	$2,367.12	$98.63
Redraw the full $20,000 before the period starts	$500,000	$500,000	$2,465.75	$0.00

The table compares interest alone. Offset account costs and extra-repayment restrictions can change the overall outcome. The offset account policy guide explains the lender-specific conditions.

Money left available for redraw has already reduced the debt. Don’t subtract the available redraw amount again when calculating interest. That would count the same extra repayment twice.

Timing also changes the saving. In this fictional case, redrawing $20,000 for the last 15 days increases interest by $49.32 compared with leaving it paid into the loan. Removing $20,000 from the offset for those same days has the same interest effect under the 100% offset assumption.

If an offset produces no expected saving, check that it is linked to the correct eligible loan. Moneysmart warns that an unlinked account can leave the loan repayment unchanged while the borrower pays excess interest. Compare the actual offset balances across the period before raising the difference with the lender.

Interest-Only and Split Loans

An interest-only period uses the loan’s interest calculation method, but the required payments don’t pay down principal. On a split loan, calculate interest separately for each split using its own balance and rate, then add the charges.

For the fictional $500,000 loan at 6%, an interest-only payment covering the unchanged 30-day period is $2,465.75, excluding fees. After paying it, the principal stays at $500,000. A 31-day period costs $2,547.95 under the same assumptions.

When interest-only payments end, principal must be repaid over the remaining principal-and-interest term. Moneysmart’s interest-only loan guide explains why payments increase at that point.

If the fictional loan has five interest-only years within a total 30-year term, it leaves 25 years to repay the principal. At the same hypothetical 6%, the equal-month formula estimates $3,221.51 in monthly principal-and-interest repayments. This assumes no principal reduction during the first five years.

For a separate split-loan example, divide the same fictional $500,000 into $300,000 at a hypothetical 6% and $200,000 at a hypothetical 5.5%. Both balances stay unchanged for 30 days and use a 365-day denominator.

Split	Calculation	Rounded interest charge
$300,000 split at 6%	$300,000 x 0.06 / 365 x 30	$1,479.45
$200,000 split at 5.5%	$200,000 x 0.055 / 365 x 30	$904.11
Combined loan	Add the two split charges	$2,383.56

Apply any offset only to the split it actually offsets. If the splits use different charging periods, reconcile each account separately before comparing their total. Give the client each split’s calculation beside its statement entry so they can see exactly which balance and rate produced the charge.