Understanding How Your Loan Works (And Why It Matters More Than You Think)

When most people think of a mortgage broker, they think of someone who helps them get a loan — and that’s a big part of what we do. We help navigate the banks, structure your loan, and make sure you’re set up with the right product.

But one of the most important — and often overlooked — parts of our role is helping you pay off that loan faster and save as much interest as possible over time.

💸 Why This Matters

With interest rates currently sitting around 6%, the true cost of a mortgage can be huge.

Let’s say you take out a $500,000 loan over 30 years at 6% interest. If you do nothing but make the minimum repayments, you’ll end up paying about $579,000 in interest. That means your total repayments over the life of the loan will be around $1.079 million.

You’ll pay more in interest than the original loan amount.

🧠 The First Step: Understand How a Home Loan Works

Before we talk about strategies to reduce the interest cost, it’s important to understand how home loan repayments actually work. Once you understand the mechanics, it becomes much easier to see how and why small changes can have a big impact.

A Real-World Example:

• Loan amount: $500,000

• Interest rate: 6%

• Term: 30 years

• Monthly repayment: $2,998

In Month 1:

• ~$2,500 goes toward interest

• ~$498 goes toward principal

• Loan balance after repayment: $499,502

In Month 2:

• Interest drops slightly to ~$2,497

• Principal increases slightly to ~$500

• Balance: $499,002

This pattern continues — slowly — with the proportion of your repayment going toward principal increasing over time.

🐢 Why Progress Feels So Slow in the Early Years

In the first 5–10 years of your loan, it might feel like you’re paying a lot each month but getting nowhere. And in a way, that’s true — because most of your repayment is covering interest, not reducing the loan balance.

It’s not until around Year 19 that you finally hit the point where more than half of your repayment is going toward principal.

That’s nearly two decades before the scales start to tip.

📊 Why Interest Reduces Over Time

Here’s the key: Interest is calculated daily and charged monthly, based on the balance of your loan each day.

So, even if it’s small at first, every repayment reduces your principal a little — and that means the next month’s interest is slightly less. That snowballs gradually over time, shifting more of your repayment toward paying off the loan.

🛠 The Levers You Can Pull to Reduce the Cost

Once you understand how the repayment structure works, it becomes clear how to reduce the total interest cost and shorten your loan term. Here are the most effective levers:

1. Lower Your Interest Rate

The lower your rate, the less interest you’re charged — which means more of your monthly repayment goes to principal.

2. Make Extra Repayments

Every extra dollar you repay goes directly to principal. For example:

• If your repayment is $2,998 and you pay an extra $100/month, that $100 goes entirely to principal — reducing your interest cost and loan term over time.

3. Use an Offset Account

Interest is calculated based on your loan balance minus any money in your offset account.
If you have $50,000 in an offset, your loan is treated like it’s $450,000. This means less interest charged each day, and more of your repayment going toward principal.

✅ Final Thoughts

There are plenty of tools and strategies available to help reduce the overall cost of your loan — but the key starting point is understanding how the loan works.

Once you understand that, everything else becomes clearer. And more importantly, the changes you make start having a real, measurable impact on your financial future.

If you’d like help reviewing your loan or understanding how to use these levers in your situation, I’d be happy to help.