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What is Compound Interest and How does it Work?

No-one likes paying interest on a loan. But understanding how it is calculated is important so you can reduce the amount you pay!

Compound Interest is when interest is paid on the initial principle/debt AND on the interest as it accumulates. For example: If you had $10,000 in a Term Deposit account that paid %5 Interest over 5 years where the interest was paid yearly you would earn $2,834 in interest as opposed to earning Simple Interest of $2500 where interest is calculated AND paid at the end of the 5 years.

In this example, Compound Interest calculates and pays interest per year to accumulate a bigger return on investment.

Simple and Compound interest work the same when we are talking about Loans. Generally a Home Loan has Compounding Interest. The interest is calculated and added to your Home Loan every month. So the lower the balance becomes, the less interest will be calculated.

By default, most Home Loans have your repayments scheduled as a monthly transaction. However, if you can change to weekly or fortnightly repayments this will REDUCE interest paid over the term of your loan. Better still, if you are able to make additional payments to your loan you will save more again and payout your loan before the scheduled end date!

If you would like more information or just to chat to us to understand further or see how this could apply to you, just give us a CALL 03 5443 9098 or get in touch HERE.

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