Have you ever wonder how the bank is charging you home loan interest? In this article, I try to give you a glimpse on how the home loan interest works.

When you accepted a loan facility with a bank, regardless of a home loan, car loan, personal loan, or for any facility, you’ll have to pay back the bank with interest on top of it.

The difference between these loan facilities is the interest rates charged and how the bank calculates the interest.

Today, we are going to talk about how the bank calculates your home loan interest.

Before we go into how the calculation works, you’ll need a few basic and understand the primary mechanism of home loans.


When borrowers take up a home loan with a bank, they will give them a home loan facility with interest rates.

Usually, it will be like this.

Base Rate (BR) + 1.25% = XX%

You can find your home loan interest rates in the bank letter offer. Typically, on the front page or the first few pages.

Just in case you have misplaced the letter offer, you can go back to the bank and check your home loan interest rates.

BR stands for Base Rate.

The Base Rate is calculated against each bank’s cost of funds and Statutory Reserve Requirement (SRR), along with the borrower’s credit risk, liquidity premium, operating cost, and profit margin.

In short, Base Rate is a mechanism the bank refers to when decides on the interest rate for your home loan package.


One of the crucial mechanisms affecting the base rate is the Overnight Policy Rate (OPR). The Overnight Policy Rate (OPR) is the minimum interest rate at which banks lend money to each other.

Bank Negara Malaysia (BNM) controls the Overnight Policy Rate (OPR). BNM committees will sit every quarterly to decide whether to increase or to lower the OPR.

Hence, when the OPR is cut, banks will lower their Base Rates accordingly. When Base Rates are reduced, so will the cost of borrowing for us consumers.

Now, if you’re taking an Islamic Loan, the bank will not use Base Rates; instead, it will use Base Financing Rate (BFR) – which is the same thing.

Since all the banks in Malaysia are allowed to peg their own BR and BFR, most banks have different BR and BFR rates.

BR and BFR are fluctuated rates. Therefore, when you’re taking a home loan, your home loan interest rate fluctuates.

When the BR and BFR go up, the home loan interest rate and monthly repayment go up.

And when the BR and BFR go down, the home loan interest rate and monthly repayment go down.


For example, if Maybank is offering you an interest rate of BR + 1.25% per annum.

First, you need to check how much is Maybank BR?

Remember when I said every bank has its own BR and BFR?

So, if you have the Bank Letter Offer, the bank interest rates and bank base rates will usually be near each other. You can find them.

If you don’t have a bank letter offer, you can check with the banker, go to the bank website, or even better, go to the BNM website and get the latest listing bank BR and BFR.

Once you have the BR rate, for instance, for Maybank is 1.75%, then you add 1.75%+ 1.25%, and you’ll get 3%.

Base Rate (BR) + 1.25% = XX%

Base Rate 1.75% + 1.25% = 3%

So, 3% per annum is the interest rate for your home loan.


If you have a bank letter offer, the bank will stated how much monthly installment you’ll need to pay monthly and for how long.

For example, like this.

“ By 420 monthly installments of RM1464 each for 35 years.”


Okay, now we reach the juicy part. It is effortless to calculate your home loan interest.

Firstly, make sure you have all the information for calculation.

For example,

Loan amount RM380,000

Tenure 35 years

Instalment RM1464

Home Loan Interest rates 3% per annum

RM380,000 x 3% = RM11400

This is the total interest you’ll pay for one year.

Let divide to monthly.

RM11400/12= RM950

This means, if you are paying RM1464 installment, part of the portion RM950 will go to the interest, and the balance RM1464-950= RM514, will deduct the principal.

Interest RM950

Principal RM514

Monthly Repayment RM1464

This calculation is based on a general estimation. And if you want something details and more accurate, you can download the mortgage calculator and look at the breakdown monthly. That will be more accurate.

I’m using Karl’s Mortgage Calculator and PCMY apps.


Home loan interest calculation is based on reducing balance. It means the interest will calculate daily or monthly based on your home loan outstanding balance.

For example,

Your home loan outstanding balance is RM380,000 on 1st January 2023.

The bank will calculate interest based on RM380,000.

And if your home loan outstanding balance is RM300,000 on 1st February 2023.

The bank will calculate interest based on RM300,000.

And if your home loan outstanding balance is RM100,000 on 1st March 2023.

The bank will calculate interest based on RM100,000.

The lower your home loan outstanding balance, the lower the interest you are paying.

But, it is important to check two things with the bank before you keep dumping the money into your home loan account.

  1. Ensure your home loan facility has a feature that allows for extra payment or an immense lump sum amount. And there is no penalty when you do so.
  2. Enquire about the possibility to withdraw back the extra amount you have paid, just in case if you need it back.

Okay guys, I hope you learn something from this article, especially how to calculate home loan interest.

If you need any assistance in getting the best home loan, you can reach us at +6012-6946746 (talk to Mr. David)

Before you go, check out this article. You might enjoy reading this.





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