MoneySavingExpert Chair, Martin Lewis · Editor, Marcus Herbert

# Doubt the bank's calculation on Interest Rate

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Forumite
1 Post
For a home loan, if annual interest rate is y, how much is the interest rate for a month ?
Bank do it as the following equation
x = y / 12
But , x should be calculated with following equation
Pow((1+x),12) = (1+y)
Here, Pow((1+x),12) means (1+x) multiply itself for 12 times
The monthly interst rate is enlarged by the bank !

Please see details on http://loancalculator.mybizcare.com

## Replies

• Forumite
276 Posts
For a home loan, if annual interest rate is y, how much is the interest rate for a month ?
Bank do it as the following equation
x = y / 12
But , x should be calculated with following equation
Pow((1+x),12) = (1+y)
Here, Pow((1+x),12) means (1+x) multiply itself for 12 times
The monthly interst rate is enlarged by the bank !

Please see details on http://loancalculator.mybizcare.com
yes, your first example is assuming simple interest, your second assumes compound. i assume mortgages operate on the latter (i.e interest is calculated on capital + interest - but I may be wrong.) :rolleyes:
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