Compound Interest

Plain-English definition. Compound interest is interest calculated not just on the original principal but also on the interest already earned (or owed) in previous periods, so the balance grows — or the debt grows — at an accelerating rate.

How it works in Australia. Australian home loans use daily compounding: the lender calculates interest on the closing balance every calendar day and debits the accumulated interest to the loan account monthly. Savings accounts and term deposits typically compound monthly or quarterly. ASIC's Moneysmart compound interest calculator is the canonical tool. The "rule of 72" is a quick mental shortcut: dividing 72 by the annual rate tells you roughly how many years until the balance doubles.

Concrete example. $10,000 invested at 7% p.a. compounding monthly for 30 years grows to $81,165 — eight times the original principal. Of that, $71,165 is interest-on-interest. On the debt side: a $700,000 mortgage at 6% over 30 years accrues roughly $810,000 of interest in total, more than the original loan, because each day's unpaid interest is added to the balance that next-day's interest is calculated on.

Common confusion. People underestimate how much faster compounding accelerates over long horizons. The first 10 years look modest; the last 10 years are explosive. This is also why making extra repayments early in a mortgage saves enormously more interest than making the same extra repayments late — early dollars compound against decades of future interest.