Your lender typically calculates the interest on your home loan at the end of each day. At the end of each month, your lender will add your daily interest charges for each day of the month. This is the monthly interest amount generally found on your bank statement.
Let’s take a look at how your daily interest charge is calculated on a home loan. Say your loan balance is $400,000 with an interest rate of 4.5% per annum. First, you would multiply the home loan balance (400,000) by the interest rate (0.045) and then divide it by the number of days in the year:
($400,000 x 4.5%)/365 = $49.31)
It’s worth keeping in mind though that lenders utilise something called an amortisation schedule, which lets the lender lay out every single scheduled repayment you’d need to make to pay off your home loan (if you didn’t refinance or otherwise change your home loan). The lender then decides how much of each repayment will be comprised of interest charges and how much will go towards your home loan principal, with lenders typically opting to ‘frontload’ much of your home loan interest.
This in turn means that the home loan repayments you’re making in the early stages of your loan term will likely not be making too much of a dent in your loan principal, but later on in the loan term your repayments will make much more of an impact on the principal and have a smaller interest component.