When you take out a home loan in Australia, your lender calculates your monthly repayment using a formula called amortisation. The idea is simple: you pay a fixed amount each month, and over time more of each payment goes toward the principal (the amount you borrowed) and less toward interest.
Most Australian mortgages are principal and interest (P&I). Each repayment covers both the interest on the outstanding balance and a slice of the principal. This means your debt gradually shrinks and you build equity in the property.
Interest-only (IO) loans are different. You only pay the interest each month — the principal stays unchanged. IO repayments are lower in the short term but you're not reducing your debt. Investors often use IO loans for tax efficiency, but regulators (APRA) have tightened rules around them in recent years. After the IO period ends (typically 1–5 years), the loan reverts to P&I and repayments jump sharply.
The standard amortisation formula is:
M = P × r / (1 − (1 + r)−n)
Where M is the monthly repayment, P is the loan principal, r is the monthly interest rate (annual rate ÷ 12), and n is the total number of payments (years × 12). At 6.14% on a $650,000 loan over 30 years, that works out to about $3,955/month — and you'll pay roughly $774,000 in interest over the life of the loan.
As of mid-2026, the cash rate sits around 4.10% and standard variable rates from the Big Four banks range from approximately 5.80% to 6.60%. Fixed rates are slightly lower for 1–3 year terms. Competition among lenders remains strong, and refinancing is common — Australians switch lenders every 3–5 years on average.
An offset account is a transaction account linked to your mortgage. The balance in the offset reduces the loan principal for interest calculation purposes. If you owe $500,000 and have $30,000 in offset, interest is calculated on $470,000. Redraw lets you access extra repayments you've made — useful in an emergency but less immediate than offset.
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