HELP ME - Which is best, Interest calculated daily or anually?

toad2898

Hello.

I am somewhat confused regarding the effect of when mortgage interest is calculated.

I have two mortgage AIP's. One is where the interest is calculated daily and the other has interest calculated annually.

Pretty much everyone I've spoke to says that a mortgage where interest is calc'd daily is better than one where it is calculated anually. However on the mortgage illustrations I have for both, in three years time it says that I will have paid more off the mortgage with the interest calculated annually. The difference between the interest rates is only 0.04%.

So how can this be a "worse" mortgage if I'll have paid more off it in a shorter space of time?

Or have I got the wrong end of the stick here and is the fact that when the interest is calculated is more important if I intend to overpay it, which I do, but only by small amounts , approx £75 to £100 per month.

Any help much appreciated as I am sick of mortgages already. Talk about making something simple difficult.

Thanks

Thrugelmir

Straightforward answer is take the interest charged monthly option if you wish to make overpayments.

On an annually charged mortgage. The interest is based on the balance outstanding at the end of the previous year. So no overpayments made during the year will reduce the interest charge. You would need to make a lump payment at the end of the year in order to reduce the balance. The interest charge for the following year would then be revised.

getmore4less

how big is the difference they are quoting.

How much are you borrowing, what rates are they quoting and the monthly payments.

toad2898

I am trying to find out what the big difference will be if I borrow:

£100,000 - 4.09% 2 years fix then 4.24 variable remaining term - £500.32/Month - int calc'd daily

or

£100,000 - 4.13% - 3 years fix then 3.49 variable remaining term - £502.61/Month - int calc'd anually

I'd like to overpay each month by approx £100 when I can afford to (I've estimated I'd be able to for 9 of every 12 months )

So which of these two mortgages would be the best option regarding my proposed overpayments

Cheers

getmore4less

The first is obviously cheaper over the first 2 years it's a lower rate

then the 2nd is cheaper for the 3rd year(if rates dont move)

then the 2 is much cheaper folloing on.

Any fees.

why 2/3y fixes usualy not a good choice.


In your first post you say the annual worked out cheaper, by how much over what timescales.

Also whats the full term?

Looks like 28 years, thos rates are APR's so the rate has been adjusted to take account of the annual interest.

If needed Someone can do the numbers for each year with and without £900 py overpayments(saving the payments a a good rate).

My guess is with a good monthly savings account and annual overpayments the 2nd will be cheaper over the 3 years than the 2y fix daily interest option(which will be cheaper over 2 years).

Thrugelmir

toad2898 wrote: »

I'd like to overpay each month by approx £100 when I can afford to (I've estimated I'd be able to for 9 of every 12 months )

So which of these two mortgages would be the best option regarding my proposed overpayments

To clarify annual interest.

On an annual calculation you interest is calculated once a year. Lets say 31st December 2011 in year 1.

So the 12 overpayments of £100 you make on the 1st of every month Jan through to December in during 2012. Will have no bearing on the interest charged during the year.

At the end of 2012 however the £1,200 you have overpaid be taken into account when calculating the interest charge for 2013.

toad2898

Thanks for the info, so both will benefit from the overpayments whether its calc's monthly or anually but without working it out (which I dont know how to do) I dont know exactly which is best to stick my money into

I dont mind fixed rates, I like to know exactly what Ill be paying for some foreseeable future.

After 2 years I will owe £600 more on the 2 year than if I took the 3 year, so not much different and this is why I'm struggling to make up my mind. This is down to the rip-off booking fee of £995 being added to the mortgage. For the 3 year it's £495 which is not as bad but i'm tied in for 3 years, not 2.

decisions, decisions, decisions!

getmore4less

toad2898 wrote: »

Thanks for the info, so both will benefit from the overpayments whether its calc's monthly or anually but without working it out (which I dont know how to do) I dont know exactly which is best to stick my money into

I dont mind fixed rates, I like to know exactly what Ill be paying for some foreseeable future.

After 2 years I will owe £600 more on the 2 year than if I took the 3 year, so not much different and this is why I'm struggling to make up my mind. This is down to the rip-off booking fee of £995 being added to the mortgage. For the 3 year it's £495 which is not as bad but i'm tied in for 3 years, not 2.

decisions, decisions, decisions!

highlighting the above

You seem confused about what fixing is about
why not look at the cheapest tracker an overpay as much as you can?

fees make a difference to the deals

How have you decided the choice is between these 2 deals?

What are you trying to do?

toad2898

I know what fixing is. I prefer to know what I'm paying even though I'll possibly pay more than a tracker - initially. At our LTV of 85% most of the trackers are nearly up at 4% anyway because this money is towards a new build and you don't get the same deals for new builds as you do for buying a "second hand" house.

I am trying to make sure that if interest rates go up then it wont affect me initially. Lets be honest they aren't likely to go down any more are they but if they do then I can live with it because I know I can afford the monthly payments on the fixed rate.

If I take the best tracker I could find 3.99 and interest rates go up by even 0.25 I'll be paying more than I would with either of these fixed rates so it doesn't make sense to do that.

I know fees make a difference but like with the rates, for 85% LTV on a new build I couldn't find one with no fees, I just don't think they exist!

Cheers

somethingcorporate

You have admitted yourself that you don't see tracker rates coming down. Why not consider a longer fix?

getmore4less

but i'm tied in for 3 years, not 2.

Does not tie in with what you are saying elsewhere

why be worried about a 3 year tie in when what you say you want is a known payment.

As sc says a longer term fix would make more sense.

With a short term you are back where you started and will need to fix again with more fees.