formula for calculating interest?

pavlovs_dog

does anyone know an exact formula for calculating interest, taking into account all the different variables (balance, interest rate, days in month etc).

my calcualtions have been getting quite close, but aren't as accurate as i would like, and i dont want to have to allow too big a margin for error.

thanks, a maths-phobe

grumbler

b - current balance (£)
AER - annual equivalent rate (%)
n - number of days in the month
I - monthly interest (£)

I=b*[(1+AER/100)^(n/365)-1]

pavlovs_dog

i knew you'd come to my rescue :beer:

pavlovs_dog

out of curiosity, what is your maths background grumbler? how come you're such a whizz?!

pavlovs_dog

oh and what does the '^' mean? is it over? (ie part a of forumla over (/divided by) part b) ?

isasmurf

pavlovs_dog wrote:

oh and what does the '^' mean? is it over? (ie part a of forumla over (/divided by) part b) ?

power, as in 3 ^ 2 = 9. (or put another way 3 squared=9)

grumbler

I don't think that one needs more serious background than A-level to write such a simple formula ...

'^' means 'to the power', 2^3=8; 3^2=9. It is almost Excel notation, besides [...] that should be replaced with (...).

pavlovs_dog

i was happy to get through GCSE!

my mental maths skills/general maths are ok, but im definatly a words girl not a numbers one!

thanks for explaining without making me feel stupid

Extractthecash

To calculate AER is the main issue. Banks don't generally give this on mortgages..

If your rate is 6% this is normally what is called a Nominal rate and so you need to divide this by the number of days in the year, then add one and the put the whole lot to the power of 365 then remove 1 and you should have your AER:

Calculation AER = !![(nominal interest/365)+1]^365}-1

In 6% example AER = !![(6%/365)+1]^365}-1
= !![1.00016438356164]^365}-1
= !!1.06183131067787}-1
= 0.0618 to 3 decimal places
= 6.18%

The different brackets are used just so you can see the calculation easier.

If banks caluculate monthly interest then replace the 365 with 12 to calculate the AER.

Remember this means that banks that calculate daily interest generally have a higher AER, but any payments you make start reducing interest from the date of the payment rather than the end of the month..

I've probably nicely confused everyone, without even going into APR, which is different from AER.

I do a bit of corporate finance and project finance work and build lots of excel spreadsheets with debt in them sadly..

However, even with this, I sometimes find it hard to reconcile the interest charges exactly from my mortgage statement..

tomstickland

I can't get 5.78% to 6% AER either. Are there any fees?

sloughflint

tomstickland wrote:

I can't get 5.78% to 6% AER either. Are there any fees?

Nope. No fees. Just bog standard repayment mortgage.
PS Sorry, I realise this is not right thread as mortgage but if anyone can help, that would be great.