How Loan Repayments Are Calculated

Every fixed-rate loan repayment is calculated using the standard amortisation formula, which ensures the loan is fully paid off by the end of the term with equal monthly payments. Understanding the maths helps borrowers make informed decisions about extra repayments and term length.

The Monthly Repayment Formula

The standard formula for a fixed monthly payment (M) is:

M = P × [r(1+r)^n] / [(1+r)^n − 1]

Where: P = principal loan amount; r = monthly interest rate (annual rate ÷ 12); n = total number of monthly payments (years × 12).

How Amortisation Works

In the early years of a loan, most of your monthly payment covers interest — a very small portion reduces the principal. As the balance decreases, the interest portion shrinks and the principal portion grows. This is why the first few years of a mortgage feel slow for building equity. The chart above makes this shift clearly visible.

The Power of Extra Repayments

Even small additional monthly payments dramatically reduce total interest paid and shorten the loan term. On a $500,000 mortgage at 6.5% over 30 years, an extra $200/month reduces total interest by tens of thousands of dollars and cuts the term by several years. Use the extra payment field above to model this.

Disclaimer

This tool provides estimates for educational purposes only. Actual loan repayments may differ based on lender fees, offset accounts, variable rates, and other product-specific features. Always consult a licensed financial advisor or mortgage broker before making financial commitments.