How the Interest on a Home Loan is calculated

Many people dread the red tape and long drawn process of buying a house. There are many details that you need to know before hand, and it is not a simple case of just handing over the money and moving in. Obtaining a property loan is perhaps the most important on the list of things to do. A Property loan is essential as not many people can afford to hand over cash for a property in one go. A property loan allows monthly payments.



Part of the responsibility of having a property loan is to pay the interest rates and that is when it starts getting difficult. You can not just take the current interest, add this amount to the total of the loan and then divide by the number of months the loan is for. It does not work like that.

There are different methods used to calculate interest rates.

Interest laws will vary from country to country, after that banks and financial lenders will use their own methods to determine the interest to pay. Methods will differ according to what loan has been taken out. Factors that banks and financial lenders take into account are
- The current interest rate
- The time period of a loan
- What kind of interest terms and conditions are attached to that loan.

How is interest on a home loan calculated?

Interest is paid on a property loan and this is calculated daily, and then totaled up at the end of the month. The interest rate that is used to calculate the repayment term will be an expected rate for a year. The amount left to pay is another determining factor that will establish the monthly repayments.

An example…

A property loan is R400 000.

The current interest rate is 13.5% per year.

In the month of March, there is 31 days.

The interest is calculated like this:

13.5/100 X R400 000 X 31/365 = R4586.30

It is important however to remember that with each payment, the amount owed will decrease therefore the above calculation will be different.

Imagine that you will pay 5000 rands, the new calculation will be as follows.

13.5/100 X R395 000 X 7/365 = R1022.67

This makes the total interest payable for that month R4573.35. Monthly payments have then been reduced by 13 rand.

Reduce the amount of interest you pay.

It is easy to see from the examples above that the sooner you pay a property loan, the less amount of interest you will pay. Remember as well that interest rates always change and with every year, you can find your repayment amounts going up or down. As this is not a certain amount, this is another valid reason to pay the property loan as quickly as you can.