Formula for Calculating Home Loan Interest

Buying a house is a significant life decision, as it involves using your savings for the down payment and also ensuring you have enough reserves for future mortgage payments. When applying for a home loan with a bank, one of the key factors to consider is the mortgage interest rate. Today, The Wisdom Property would like to help you get acquainted with the different types of mortgage interest rates you should know before applying for a loan, along with a simple method for calculating mortgage interest.

What is home loan interest?

A home loan interest rate is the rate applied to the loan amount borrowed from a bank for purchasing a home. Generally, home loan interest is calculated using a floating rate method (Floating Rate Loan). However, there are three other types of home loan interest rates that differ from the floating rate, which are as follows:

1. Fixed Interest Rate (Fixed Rate Loan)

A fixed interest rate is a predetermined rate that remains constant throughout the loan period or for a specific duration set by the lender. For fixed-rate loans, there are three types:

Short-term fixed interest rate initially, which then changes to a floating rate.
Fixed interest rate for the entire loan duration.
Short-term step-fixed interest rate initially, which then changes to a floating rate.

2. Floating Interest Rate (Floating Rate Loan)

A floating interest rate is an interest rate that changes according to the cost of funds for financial institutions. This rate may fluctuate over time based on the bank’s cost of funds, which can increase or decrease. Typically, floating interest rates are based on the benchmark interest rate set by the central bank of each country.

The benchmark rate, also known as the reference rate, influences the floating interest rate. The common reference rates used by commercial banks include:

MLR (Minimum Loan Rate): The interest rate charged to large, creditworthy customers with a good financial history and adequate collateral. This rate is often used for long-term loans with a fixed term, such as business loans.
MOR (Minimum Overdraft Rate): The interest rate applied to large customers with a good financial reputation who use overdraft facilities.
MRR (Minimum Retail Rate): The interest rate charged to individual customers with good credit, such as for personal loans or home loans.

3. Fixed Interest Rate for a Period, Then Adjusted at Regular Intervals (Rollover Mortgage Loan)

A rollover mortgage loan has a fixed interest rate for a certain period, such as 3 to 5 years, and then the interest rate is adjusted to a new fixed rate every 3 to 5 years throughout the loan term, which typically lasts 25 to 30 years. The interest rate for each period is set based on the cost of bonds plus 2.5%. For example, if the bond cost is 5%, the loan interest rate would be 7.5%.

However, the most crucial aspect when purchasing a home is evaluating your financial capability. This involves calculating your income, the loan duration, the home loan interest rate, and any existing debt obligations. Today, we’ll show you how to calculate monthly home loan interest to help assess your ability to afford a home.

Example:

Let’s say someone wants to loan 1.5 million THB to purchase a house, with the bank offering a monthly installment of 9,500 THB (loan term: 30 years). The bank is offering a promotional interest rate of 0.60% for the first 8 months (assuming 1 month equals 30 days).
The interest on the home loan will be calculated as follows:

Interest = 1,500,000 x 0.60% = 9,000
Then, calculate the time factor:
9,000 x (30 / 365) = 738 THB.

When making the monthly payment of 9,500 THB, the first payment will cover the interest of 738 THB.
Therefore, the remaining amount, after deducting the interest (9,500 – 738), will be 8,762 THB, which will be used to pay down the principal.
The remaining loan balance will then be 1,499,262 THB (1,500,000 – 738), and this remaining balance will be used to calculate the interest for the next month.