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Home loan interest is calculated daily on your outstanding balance. Understanding this changes how you think about offset accounts, extra repayments and loan structure.
By Jason Given · April 2026 · 5 min read
Most Australian home loans calculate interest daily on your outstanding balance and charge it to your account monthly. This means two things: your balance at the end of each day directly affects how much interest you pay, and anything that reduces your daily balance — extra repayments, offset account deposits — saves you real money.
The daily interest calculation formula is: Outstanding balance x Annual interest rate / 365. On a $500,000 loan at 6% per annum, the daily interest is approximately $82.19. Over a 30-day month, that is approximately $2,466 in interest for that month.
Because interest accrues daily, the exact timing of your repayments and deposits matters. A repayment made on the 1st of the month saves more interest than the same repayment made on the 28th. Money sitting in an offset account reduces your balance every day it is there — not just at the end of the month.
An offset account linked to your home loan reduces the balance on which interest is calculated. If you have a $500,000 loan and $50,000 in a 100% offset account, interest is calculated on $450,000. At 6%, that saves approximately $3,000 per year in interest — with no extra repayment required.
On a principal and interest (P&I) loan, each repayment covers the interest accrued for that period plus a portion of the principal. In the early years of a loan, most of each repayment goes toward interest. As the balance reduces, more of each repayment chips away at the principal.
On an interest-only (IO) loan, repayments cover only the interest accrued — the principal does not reduce. This results in lower repayments but no equity building through repayment. Interest-only loans are common for investment properties where the borrower wants to maximise cash flow and tax deductibility.
Lenders advertise a headline interest rate, but the comparison rate combines the interest rate with most fees into a single annual percentage. A loan with a 5.89% headline rate and a $400 annual fee has a higher comparison rate than 5.89% — and may cost more than a 5.99% loan with no fees.
Always compare loans using the comparison rate. Lendology presents both rates and the full fee schedule for every loan option so you can make a genuine comparison.
Daily interest is calculated as: outstanding balance x annual rate / 365. Monthly interest is the sum of each day's interest charge for that month. On a $500,000 loan at 6%, monthly interest is approximately $2,466 in the first month.
Yes. Fortnightly repayments result in 26 half-payments per year — equivalent to 13 monthly payments instead of 12. The extra payment reduces your balance faster, saving thousands in interest over the life of a 30-year loan.
An offset account is a transaction account linked to your home loan. The balance in the offset account is subtracted from your loan balance before interest is calculated each day. A $50,000 offset on a $500,000 loan means interest is calculated on $450,000.
A redraw facility holds extra repayments within the loan account and reduces the balance on which interest is calculated — similar to an offset account. The key differences are accessibility and tax treatment for investment properties. Speak with your accountant about which suits your situation.