Mortgage Guide
How Mortgage Repayments Work
Understand the maths behind your repayments and why the interest-to-principal ratio changes over time.
The Amortisation Formula
A standard principal-and-interest mortgage uses an amortisation formula to calculate a fixed periodic repayment that fully repays the loan by the end of the term.
- P = loan principal (amount borrowed)
- r = periodic interest rate (annual rate ÷ periods per year)
- n = total number of repayment periods
How Each Payment Splits
Every repayment is split into two components:
Interest Component
Interest = Outstanding Balance × Periodic Rate
Calculated on the remaining balance at that point in time.
Principal Component
Principal = Total Payment − Interest
The remainder reduces your loan balance.
In the early years, most of each payment goes to interest because the balance is high. Over time, as the principal falls, more goes to principal. This is the nature of amortisation.
A Practical Example
On a $640,000 loan at 6.5% p.a. over 30 years (monthly repayments):
| Period | Payment | Interest | Principal | Balance |
|---|---|---|---|---|
| Month 1 | $4,045 | $3,467 | $578 | $639,422 |
| Month 12 | $4,045 | $3,434 | $611 | $633,234 |
| Month 60 | $4,045 | $3,206 | $839 | $592,068 |
| Month 180 | $4,045 | $2,555 | $1,490 | $469,783 |
| Month 300 | $4,045 | $1,430 | $2,615 | $261,543 |
| Month 360 | $4,045 | $22 | $4,023 | $0 |
Indicative figures only.
Try it yourself
Enter your property price, deposit, and rate to see your exact amortisation schedule.
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