Interest is a major cost to factor into your home loan decisions. When repaying your home loan, not only do you have to repay the principal (loan amount) each month, but you also have to pay the interest charged on top of your balance.

Most borrowers have a loan term between 20 and 30 years. Even though home loan interest rates tend to be low, in comparison to credit cards and car loans, the total interest does add up over this time.

For example, on a 25 year $300,000 mortgage with a 3% interest rate, you’ll pay about $126,790 in interest. That is a lot to spend on interest alone!

This is why it’s important to jump on opportunities to save money and reduce your interest rate. In this article we’ll explain how interest is calculated, tell you how to pay less home loan interest, and show you how much you could save with a lower rate.

Unfortunately, banks aren’t in the business of lending money for free. They have a number of costs to cover and also want to make a profit, so they charge interest on top of the loans they provide. Think of interest as a percentage-based borrowing fee because you are using someone else’s money.

Interest is calculated from the daily closing balance of your loan and is only accrued from your loan amount at the time. This is why making principal and interest repayments, and making extra repayments (if possible) can be very helpful. The lower your loan balance, the less interest you will be charged.

Getting a good interest rate is critical for borrowers wishing to minimise their interest payments. Even a marginal 0.5% interest rate reduction can make a significant difference in the long term.

For example, if you get a 30 year $400,000 home loan with a 3% interest rate, you’d pay an approximate total of $207,109 in interest. With a 2.5% interest rate, you’d pay about $168,974 in interest over the life of the same loan.