What a home loan really costs over thirty years
A mortgage is the only debt most people hold for three decades, and the arithmetic behaves very differently at that length. The instalment looks manageable; the total does not.
On the default scenario the interest exceeds the amount borrowed. That is not unusual at thirty years — it is what a long term does to a compounding balance.
The formula behind the number
An amortising loan is repaid in equal instalments. Each one covers the interest that accrued since the last payment, and whatever is left reduces the balance. The instalment that brings the balance to exactly zero on the final payment is:
Here P is the amount borrowed, i is the monthly rate (the annual rate divided by 12) and n is the number of payments. Nothing else enters the calculation, which is why two lenders quoting the same three inputs must arrive at the same instalment.
Worked example: $250,000 at 6% over 30 years
The calculator opens on this scenario, so you can follow every step:
- Amount borrowed: $250,000
- Annual rate: 6%, so the monthly rate is 6 ÷ 12 = 0.5000%
- Term: 30 years, so n = 30 × 12 = 360 payments
Paying $1,498.88 every month for 360 months comes to $539,595. Subtract the $250,000 you actually borrowed and the cost of the credit is $289,595, or 116% of the sum borrowed.
Where each payment goes
The instalment never changes, but its composition does. The first payment carries $1,250.00 of interest and only $248.88 of principal. By payment 180 the split has moved to $891.15 interest against $607.73 principal.
| Payment | Instalment | Interest | Principal | Balance |
|---|---|---|---|---|
| 1 | $1,498.88 | $1,250.00 | $248.88 | $249,751 |
| 2 | $1,498.88 | $1,248.76 | $250.12 | $249,501 |
| 3 | $1,498.88 | $1,247.51 | $251.37 | $249,250 |
| 180 | $1,498.88 | $891.15 | $607.73 | $177,622 |
| 360 | $1,498.88 | $7.46 | $1,491.42 | $0.00 |
In the first year roughly four-fifths of every payment is interest. Homeowners who sell after five years are often surprised by how little principal they have repaid.
What moves the answer most
Two levers change the total, and they do not pull with equal force.
Add one percentage point to the rate and the instalment goes from $1,498.88 to $1,663.26, which is $59,177 more over the full term. Cut 5 years off the term instead and the instalment rises to $1,610.75, but total interest falls from $289,595 to $233,226. Five years off a thirty-year mortgage removes a disproportionate share of the interest, because the payments you cut are the ones furthest in the future.
What this calculator leaves out
This shows principal and interest only. Property tax, buildings insurance, mortgage insurance where the deposit is small, and any service charge are additional and can add a quarter or more to the monthly outlay.
Related calculators
- Full mortgage calculator — adds tax, insurance and service charges
- Affordability calculator — works backwards from your income
- Loan-to-value calculator — the ratio lenders price against