Calculation Methodology
How the Mortgage Repayment Calculator works — formulas, assumptions, and data sources used to produce every result.
Estimate vs Precision Modes
The calculator operates in estimate mode, which uses a simplified monthly-period model to produce fast, accurate approximations. All calculations assume equal-length monthly periods (1/12 of a year) and apply the standard annuity formula.
A future precision mode (V1.5) will introduce daily interest accrual using the ACT/365 day-count convention, real calendar dates, stub period handling, and business day adjustments. The estimate-mode engine is architecturally designed to be swapped for the precision engine without UI changes.
What estimate mode excludes
- Real calendar dates and month-length variation
- Daily interest accrual (ACT/365)
- Public holidays and business day adjustments
- Rate changes mid-term
- Split loans (fixed + variable portions)
- Stub periods (partial first period)
Repayment Formula
Monthly principal and interest (P&I) repayments are calculated using the standard annuity formula, which produces equal periodic payments that fully amortise the loan over the term.
Where:
P= periodic payment amountL= loan principal (in cents)r= periodic interest rate =annualRate / periodsPerYearn= total number of periods =termMonths × (periodsPerYear / 12)
In estimate mode, periodsPerYear is fixed at 12 (monthly). For zero-interest loans, simple linear division is used: payment = principal / n.
Frequency Conversion
When users select fortnightly or weekly repayments, the calculator supports two conversion methods:
Method A: Divide Monthly (Bank Standard)
This is the default, matching how most Australian lenders handle non-monthly repayments.
This method creates one extra monthly equivalent per year (26 fortnights = 13 months, 52 weeks = 13 months), which accelerates principal repayment and reduces total interest over the life of the loan.
Method B: True Period (Academic)
Recalculates the annuity formula using the actual periods per year (26 for fortnightly, 52 for weekly). The annual total is exactly equivalent to 12 monthly payments — no acceleration effect.
The savings breakdown explicitly shows the interest and time saved from the divide-monthly method compared to true-period, so users can see the benefit of more frequent payments.
Amortisation Schedule
The schedule is generated month by month from period 1 to the loan term. Each period follows this processing order:
- 1Lump sums applied at start of period (reduces principal before interest)
- 2Offset balance resolved from step-function schedule
- 3Interest calculated on (balance − offset) × periodic rate
- 4Regular payment applied (IO or P&I depending on period)
- 5Recurring extra repayments applied (principal only)
- 6Fees charged (upfront, ongoing monthly, or annual)
The schedule terminates early if the balance reaches zero (e.g., due to extra repayments). The final payment is automatically adjusted to clear the exact residual balance, avoiding overpayment.
Rounding & Precision
All monetary values are stored internally as integer cents to avoid floating-point precision issues common in financial calculations. For example, $1,234.56 is stored as 123456 cents.
Rounding is applied at each calculation step:
- Each period's interest charge is rounded to the nearest cent
- Frequency conversion results are rounded (ceil for divide-monthly)
- Offset balance conversions and all arithmetic operations
- Dollar-to-cents conversion on user input
Display formatting uses Intl.NumberFormat("en-AU") with AUD currency formatting, showing or hiding cents as appropriate for the context.
Offset Account Modelling
An offset account reduces the loan balance used for interest calculation. The effective interest is charged only on the net balance:
Key behaviours:
- The offset balance is floored at zero (cannot produce negative interest)
- Multiple offset accounts are supported — effective offset is the sum of all account balances
- Offset accounts support step-function scheduling for modelling changing balances over time
- A percentage parameter (0–100%) allows modelling partial-offset products
During interest-only periods, the offset reduces the IO payment amount rather than the principal balance (since no principal is being repaid).
Savings from offset are calculated by comparing a full schedule run with offset enabled against one without — showing both interest saved and months saved.
Extra Repayments
Two types of additional payments are supported:
Lump Sum Payments
- Applied at the start of the period (before interest is calculated)
- Directly reduce the principal, lowering interest for that period onwards
- Multiple lump sums can be scheduled for specific months
- Capped at the remaining balance to prevent overpayment
Recurring Extra Payments
- Applied after the regular scheduled payment each period
- Reduce principal only — do not substitute for the regular payment
- Non-monthly frequencies are annualised then divided by 12 for the monthly schedule (e.g., fortnightly: amount × 26 / 12)
- Can be restricted to a date range (start and end dates)
- Capped at the remaining balance
Interest-Only Modelling
During an interest-only (IO) period, the borrower pays only the interest charge each month with no principal reduction:
When the IO period ends, the payment is recast on the remaining balance and remaining term:
This typically results in payment shock — the new P&I payment is significantly higher than the IO payment because the same principal must be repaid over a shorter remaining term. The calculator displays this difference prominently.
- IO period is specified as a number of years (max 5 for owner-occupiers, 10 for investors)
- Principal balance remains unchanged throughout the IO period
- Extra repayments during IO still reduce the principal
LMI Estimation
Lenders Mortgage Insurance (LMI) is estimated when the Loan-to-Value Ratio (LVR) exceeds 80%:
LMI premiums are estimated using a rate table based on industry data (Helia / Genworth equivalent), organised by LVR tier and loan amount band:
| LVR Tier | Loan Bands | Rate Applied To |
|---|---|---|
| 80–85% | $300K, $500K, $600K, $750K, $1M+ | Loan amount |
| 85–90% | $300K, $500K, $600K, $750K, $1M+ | Loan amount |
| 90–95%+ | $300K, $500K, $600K, $750K, $1M+ | Loan amount |
Additional adjustments:
- Investor loading: 15% surcharge applied for investment properties
- State stamp duty on LMI: Varies by state (e.g., VIC 10%, SA 11%, ACT 6%, NSW 0%)
- Capitalisation: LMI premium + stamp duty is added to the loan principal by default, increasing total repayments
Comparison Rate Methodology
Comparison rates are calculated per the National Consumer Credit Protection Act 2009 (NCCP), Schedule 6. The comparison rate provides a single percentage figure that represents the true cost of a loan including fees.
Standardised basis (locked)
- Loan amount: $150,000
- Term: 25 years (300 months)
- Frequency: Monthly P&I repayments
The calculation uses a Newton-Raphson IRR solver to find the annual rate that satisfies:
Where:
netAdvance= loan amount minus upfront feescashflowincludes: base payment, monthly fees, annual fees, and discharge fee at maturityr= monthly rate solved via Newton-Raphson (up to 1,000 iterations, tolerance 1e-10)
If the loan has a fixed-rate period with a revert rate, the cashflows reflect the payment change at the revert point, with the new payment recalculated on the remaining balance.
Stress Test Approach
Rate stress testing shows the impact of potential rate rises on repayments. The calculator models five standard increments applied from period 1:
For each scenario:
- New rate = current rate + increment
- New payment recalculated using the standard annuity formula
- Monthly increase = new payment − current payment
- Annual extra cost = monthly increase × 12
The +3.00% scenario aligns with APRA's prudential serviceability buffer, which lenders are required to apply when assessing borrower capacity. This is shown alongside the stress test results for context.
Refinance Break-Even Analysis
The refinance calculator compares the cost of staying with the current loan against switching to a new loan at a different rate.
Switching costs include discharge fees, application fees, legal fees, and any other costs associated with refinancing. If monthly savings are zero or negative, the break-even period is infinite (refinancing does not save money).
Lifetime savings compare total repayments over the remaining term for both scenarios, accounting for potential term extension in the new loan. This is not a simple scaling of monthly savings by term length.
Locked Assumptions
The following assumptions are documented and locked in the estimate-mode engine. They cannot be changed by the user and are applied consistently across all calculations:
| Assumption | Value |
|---|---|
| Period length | Monthly (1/12 annual rate) |
| Interest rounding | Nearest cent each period |
| Frequency conversion default | Divide-monthly (bank standard) |
| Offset reduces | Balance before interest calculation |
| Extra payments | Reduce principal only (after scheduled payment) |
| Lump sums | Applied start of period (before interest) |
| IO→P&I transition | Recast on remaining balance and term |
| Final payment | Adjusted to clear exact residual |
| Stress test | Rate increase applied from period 1 |
| LMI | Capitalised into loan principal |
| LMI investor loading | 15% surcharge |
| APRA serviceability buffer | 3.00% (300 bps) |
| First payment timing | 1 period after loan start |
| Comparison rate basis | $150,000 over 25 years |
Sources & References
The calculator uses data and methodologies from the following authoritative sources:
ASIC MoneySmart — Home Loans
Government consumer guidance on home loans, including how repayments, offset accounts, and LMI work.
Reserve Bank of Australia — Cash Rate
Official cash rate target and historical data used for rate benchmarks.
RBA — Indicator Lending Rates
Published lending rate statistics used for default rate values and comparisons.
NCCP Act 2009, Schedule 6
Legal framework for comparison rate calculation methodology.
APRA Prudential Practice Guide — APG 223
Prudential standards including the 3% serviceability buffer and DTI limits.