Why can the amounts of interest and principal I pay change over the course of my loan?

When you start making mortgage repayments you might notice that most of your repayment is paying off the interest interest at the beginning of the loan. Only a small amount will go towards the principal. As you continue paying off the loan you'll pay off more principal and less interest.

Why do we pay interest?

A lender is a business, and like any other business it wants to make a profit. The interest you pay is part of their profit. To answer why the interest we pay fluctuates we first need to know where lenders get the money they lend from. When you apply for a loan, your lender will source funds for you from a range of places. According to the Reserve Bank of Australia (RBA) almost half of this now comes from the domestic market. This means some of your loan money will be made up of funds taken from other Australian's savings and term deposit accounts. The other portion is borrowed from wholesale lenders, which can be from sources such as superannuation funds or other investment funds looking for safe investments. When your lender's funding costs increase, they typically charge more interest to borrowers. The cash rate set by the RBA each month also has a significant bearing on how much interest is paid. This is why your repayments can fluctuate each month. If the RBA lowers the cash rate, it could become cheaper for lenders to source funds for loans and therefore lenders may lower their interest rates. It's part of the reason why a continual comparison of the other loans in the market is always necessary.