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Are you paying too much on your home loan?

8 minutes| Jun 01 2026

By Philippa Billings, Chief Advice Officer, Otivo

The interest rate on your home loan was set on the day you signed, but the market has moved several times since, and the rate you're on may no longer be the rate you'd be offered today. With high interest rates, many Australians are carrying a mortgage priced for a different moment. The reassuring part is that the cost of a home loan runs on more than the headline rate, and several of the levers sit within reach. Here's how home loan interest is actually charged, where the money quietly leaks, and the moves many borrowers use to bring the cost down.

Quick answer

Home loan interest is charged daily on your outstanding balance, so both the rate and how fast you cut the balance shape the total cost. Reviewing your rate, repayment frequency and offset use are common ways to lower it.

How is home loan interest actually charged?

Most home loans calculate interest daily and charge it monthly. Each day, your lender applies your interest rate to the balance you still owe, then adds that day's interest to the tally. Two things follow from this. The rate matters, obviously. But so does the balance, because every dollar you knock off, and every day it stays off, trims the interest charged from that point on.

It's why the same loan can cost very different amounts depending on how it's run, not just the rate printed on the contract. This daily mechanic is the reason offset accounts and extra repayments work at all, as ASIC's MoneySmart explains.

Why might you be paying more than a newer borrower?

Lenders compete hardest for new customers. The rate that won your business a few years ago can quietly sit above what the same lender now advertises to someone walking through the door, and that gap widens every time rates move and existing loans don't get repriced. After recent rate increases, the gap has caught a lot of households who haven't looked at their loan since they took it out.

You have more leverage here than it can feel like. MoneySmart notes that telling your current lender you're looking at a cheaper loan elsewhere can be enough for them to reduce your rate to keep you, and that borrowers with at least 20% equity in their home generally have more room to negotiate. A short phone call sometimes does what months of extra repayments can't.

The four levers that decide what your mortgage costs

Strip it back and the cost of a home loan comes down to four levers, only one of which is the rate itself.

The first is the rate you're on, and whether it still reflects what's available. The second is how often you repay, because interest is calculated daily, so the timing of repayments changes how much of the balance is exposed to interest and for how long. The third is how much extra you put in beyond the minimum. The fourth is the loan's features, chiefly an offset account or a redraw facility, which let your savings work against the balance.

Most borrowers pull on one lever and forget the rest. Pulling on two or three together is where the real difference tends to show up.

Offset or redraw, what's the difference?

Both reduce the balance your interest is calculated on, but they behave differently. An offset account works like an everyday transaction account linked to your loan; the balance sitting in it is subtracted from your loan balance each day before interest is worked out, and you can still spend it whenever you like. A redraw facility holds the extra repayments you've already made, which you may be able to pull back out, subject to your loan's rules.

MoneySmart's guidance is to weigh any package or account fees against the interest you'd actually save. An offset only pays its way if you keep a meaningful balance in it.

Do extra repayments and fortnightly payments really make a difference?

More than most people expect, because of where they land in the loan's life. On a typical 25-year principal-and-interest mortgage, most of your early repayments go towards interest rather than the balance, so anything extra in those first years works unusually hard, reducing the balance that all future interest is charged on.

Repayment frequency is the quiet one. There are 26 fortnights in a year but only 12 months, so paying half your monthly amount every fortnight adds up to the equivalent of one extra monthly repayment a year, without it feeling like you've changed much. MoneySmart points out that a lump sum, such as a tax refund or a bonus, dropped straight onto the loan does similar work. Lender rules vary, so the size of the effect depends on how your particular loan applies repayments.

Is it worth reviewing or switching your home loan?

For many Australians, the answer turns on the gap between their rate and what's on offer, set against the cost of moving. MoneySmart works through an example of a borrower who switches loans and saves $84,040 over the life of a 25-year mortgage, around $280 a month, and recovers the switching costs within five months. The figure is illustrative rather than a promise; the actual result depends on the rate gap, the fees and how long the loan has left to run.

A few things tend to matter when people weigh it up. Comparing like with like, so a loan with the same features rather than just a lower headline rate. Checking the fees on both sides, since exit and establishment costs can eat into the saving. And remembering that the existing lender is an option too, not only a competitor to leave.

Otivo holds AFSL and Australian Credit Licence No. 485665, which is what allows it to provide general information like this on home loans and credit. None of it is personal advice, because the right move always depends on the specific loan and the person holding it.

Frequently asked questions

What counts as a good home loan interest rate?

There's no single number, because the rate you're offered depends on your deposit or equity, the type of loan and your circumstances. A useful test isn't a national average; it's whether your rate is close to what your lender, and others, currently offer someone taking out a comparable loan.

Does an offset account reduce home loan interest?

Yes. Because interest is calculated daily on your balance, money sitting in a linked offset account is subtracted before that day's interest is worked out, so you're charged interest on a smaller amount. MoneySmart suggests checking whether any account or package fee is smaller than the interest you'd save, since offsets favour people who keep a decent balance in them.

Will paying fortnightly instead of monthly really help?

It can. Paying half your monthly repayment every fortnight means 26 payments a year, which works out to roughly one extra monthly repayment annually, chipping at the balance a little faster without a budget overhaul. How much it helps depends on your loan's rules for applying repayments, so it's worth confirming with your lender.

What if I'm finding the repayments hard to manage?

Reaching out early tends to open up more options than waiting. Lenders can sometimes adjust terms or pause repayments for a period, and free, confidential financial counsellors are available through MoneySmart's guidance on problems paying your mortgage. There's no cost and no obligation in asking.

Where to from here

Home loan interest rewards attention. Knowing the rate you're on, glancing at what's available, and understanding how repayments and offsets feed back into a daily interest calculation puts you in a stronger position to make a call than leaving the loan to run untouched. Otivo's debt advice can help you map out ways to reduce what your loan costs and pay it down sooner, weighing your income, expenses and the other debts you're carrying. If your repayments have crept up with the cash rate, it may be worth a look.

Disclaimer

The information in this communication is current as at June 2026 and has been prepared by Otivo Pty Ltd ABN 47 602 457 732, AFSL and Australian Credit Licence No. 485665. This content is general information only and has been prepared without taking into account your objectives, financial situation or needs. It is not personal financial or taxation advice and should not be relied on as such. Before acting on any information, you should consider its appropriateness having regard to your personal circumstances. This material must not be reproduced in whole or in part, or posted on any social media platform, without the prior written consent of Otivo Pty Ltd.

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