Mortgage interest calculation -- daily interest

Same problem here, and my boyfriend is on a 2 years fixed interest rate mortgage with Nationwide (don't know the product code). Looking through their 2001 mortgage conditions it seems to be important which interest calculation method is applied to the account: the annual method or the daily method. In the annual method, interest is calculated on the outstanding debt at last year-end, i.e. the capital part of the monthly payments are not deducted from the balance for the purpose of interest calculation. This does not affect overpayments, which are deducted from the balance right away. The daily method, on the other hand, does exactly what you think: calculates interest on the exact balance every day.

The annual method applies by default. I wonder if one can switch to the daily method and still keep the same interest rate. To me it looks like the bank would be losing out on interest.

The ability to switch will depend on whether the mortgage product allows you to switch, rather than the nature of the underlying interest calculation method.

It is an urban myth (both often promoted in the press) that lenders prefer the annual method because 'they get more interest'. Whilst the annual method will mean a mortgagor pays more interest for a given notional interest rate, the difference is reflected in the APR and daily methods will charge a higher notional rate to achieve the same APR.

I didn't know Barclays had branches in rural Ayrshire.

Actually they do something most peculiar. I've just gone back to the three first statements for my NatWest One account.

For the first month there is an opening balance and one cashpoint withdrawal. The interest rate was 5.1% for 05/05/04-06/05/04 and 5.35% from 07/05/04 to 25/05/04.

Doing the calculation Interest=Amount outstanding * IR/365 and I get a total of 209.36 interest - The statement says "The total interest on all your borrowing covering these periods is 209.36. We will collect this from your account on 21/06/2004.

I then did the same calculation for the following month. This time my calculation gives 302.54 while the actual amount charged is 303.38. The only way I can make these balance is to charge interest on the 209.36 interest from the previous month on every day from 25/05 to 21/06 when the amount is actually deducted from my balance. Ditto for the following month.

It's not completely consistent; for my calculation I need to charge interest on the 209.36 interest for 25/05/04 which is the last day of the statement but I don't need to charge interest on the 303.38 for 27/06/04 which is the last day of the next statement.

Whether they actually do a simple interest calculation or a compounded daily calculation I can't tell. But according to the interest rate they quote they are charging interest on interest that hasn't yet been debited from the account.

Calculating the equivalent daily compounded rate and doing the calculation that way I can't get exact agreement with the statement figures but I'm out by 30p, 80p and 40p in the first three months (on total interest of 700GBP) which is closer than if I don't include the interest on interest on the simple calculation. There's no obvious rounding that will "fix" these differences.

Tim.

In message , Tim Woodall writes

Yes, some lenders who delay the application of accrued interest after the day the accrual ceases still accrue interest in the interest accrued from the day it falls due until the day it is debited to the main account.

It still has the same effect as if the account were debited at the end of the charging period.