Nationwide - Daily Interest

george-ddd

Dear MoneySaving Experts.
Can I check with you about the way the interest is calculated on my mortgage. I'm with the Nationwide, and they have daily interest, which I always thought was a good thing.
However, I've recently been keeping a closer eye on my mortgage account. This was because when I logged into my mortgage account last year the amount that I owed seemed to go up and down, but it also showed the amount of interest, which always went up.
So I logged into the account on the 1st of January and for several days after that and tried to figure out what was happening. It seems that everyday the add the interest onto the account, £18 per day in my case, and then when a payment is made the amount owed gets reduced.
But isn't this like having interest compounded daily. So for example. If I owed £100,000 pounds at an interest rate of 5%, then I could expect to pay back £5000 in interest. However if the interest is added each day. ie paying interest on the interest then I reckon (assuming for simplicity that I don't make any payments) that I would end up owing an additional £5126.70.
So my questions are
1. Have I got this right?
2. Is daily interest a good thing?
2. Is the interest on my savings account calculated in the same way?

determined1_2

The way the interest is calculated (on mine anyway) is the capital balance outstanding the night before is multiplied by the rate of interest and divided by the number of days in the year (either 365 or 366) to give the daily interest amount.

The interest will then accrue at this amount each day until a payment is made. At this point, the interest that has accrued since your last payment hits the capital balance (increases it) and then your payment is taken off. This will then give you a new capital balance outstanding.

The daily interest is not added to the account daily otherwise you would be paying interest on your interest.

So, an example:

£100,000 capital balance outstanding 01.01.09
Rate of interest 5%
Payments made on the first day of the month
You month would therefore run 2nd - 1st
Standard payment £650 (just for an example sake)

The daily interest for 02.01.09 would be:

£100,000 x 5% / 365 days = £13.70

This is the amount of interest that accrues each day until a payment is made.

The next payment will be made on the 01.02.09 so that means there is 31 days of interest:

31 x £13.70 = £424.70

To be fully accurate to eliminate rounding differences, it would be:

£100,000 x 5% x 31 / 365 = £424.66

So, on the 01.02.09 the following happens:

Old capital balance £100,000.00
Months accrued interest £424.66
Payment (£650.00)

New capital balance at 01.02.09 = £99,774.66

The daily interest from 02.02.09 would be £99,774.66 x 5% / 365 = £13.68. It would be this much each day until a payment is made. I.e. 01.03.09

So the months interest would be £99,774.66 x 5% x 28 / 365 = £382.70

Old capital balance £99,774.66
Months accrued interest £382.70
Payment (£650.00)

New capital balance at 01.03.09 = £99,507.36


Note that you need to be aware of banks financial year end as this could change the number of days in the year bit of the calculation if their financial year straddles the leap year. E.g. as 2008 was a leap year, if the banks year end was 31 March 08, the daily interest calcualtion on 12 March would still be / 366 days.

So,

1) see above
2) yes
3) not sure, but I imagine so

Hope this helps

george-ddd

Its taken me months to work this out and you could write it out straight out. Impressed.
I've been keeping my spreadsheet since new year. I think its pretty accurate a few pence out in about £100k - due to rounding errors I think.
I extrapolated all the way to the mortgage end date in 2025.
It really focuses you on how much interest you have to pay, in my case over £70k - just interest. And you can see the difference an overpayment makes now. The overpayment of £500 I made this month will save £720 in interest over the next 16 years

dimbo61

I am overpaying my mortgage by £500 a month !
It will save me ......£50,000 in interest over the term of the mortgage and knock 12 years off the term.
Keep the faith MF for me please.