When is interest calculated on your home loan?

Home loan interest is calculated deep inside the computer systems of your favourite lenders based on daily balance of your loan (less any redraw or money sitting in your account) and charged in arrears (after the fact) at the end of the month. You might see this term "interest charged" on your statement as a separate item or it may be included in the repayment they draw; different lenders, different systems.

If you're selling or refinancing you'll see another term pop up, 'accrued interest', this is basically the interest that the computer has been calculating behind the scenes between your last repayment and today. It's not extra interest, and if you settled the moment after you paid your repayment you wouldn't have any accrued interest at all. If your payout figure includes accrued interest it simply means there's a repayment in your account that won't go out because of the change of loan.

The one you don’t want to see is ‘default interest’ that means there’s been an issue and it needs to be rectified ASAP. Even if you’re having an issue where the loan repayment goes out a few days after its supposed to this will look really bad to any potential lender you want to talk to about refinancing, and, in an era of positive credit reporting it will be recorded on your credit file as a negative ranking if not now then in the future.

In a perfect world I would say always keep spare cash in the account enough to cover the repayment or alter the repayment date (or your pay date) to make sure the money is always there. Default interest is often accompanied by a nasty fee and is also typically 2%-3% above your standard interest rate so it pays to keep on top of this.

In any case, do your best, and reduce the balance as soon as you can to save buckets of interest down the track remembering that if they’re calculating interest daily then the sooner its in the sooner its saving.

Article for The Western Weekender