Daily vs annual interest

kthms

Hi all

Long time lurker, 1st time poster! Can I start by saying thanks to all who commit their time and expertise to these forums, it is an excellent resource

I'm currently in the process of remortgaging and I've come across two fixed rate deals that are almost the same. One is a 4.1% rate, The other a 3.99% rate. Both are fee free and have similar clauses regarding overpayment etc. the only difference I can see is the slightly higher rate mortgage calculates interest daily whereas the 3.99% calculates interest annually. Is the fact interest is calculated daily make the slightly higher rate product the better deal?

The mortgage is for £100,000 on a property valued at £120,000 if that helps! Monthly repayments are around £570 for both

Any advice would be gratefully received

Kev

DavidLaGuardia

I make the 3.99% rate annual the same as one that is 4.06% on a monthly or daily basis (if you make monthly payments there is little difference between monthly or daily)

So, not much in it, but the 3.99% is a gnat's whisker cheaper, so look at the other differences, if there are any. E.g. Is it an introductory rate and what does it go to after? - you cannot assume you will always be able to remortgage.

patman99

Don't forget, with annual percentage all the money you pay each month only gets deducted from the capital amount at the end of each 12 months. The interest is calculated before the money is deducted. So you will pay interest on all the money you paid in over the year.

With daily interest, every time you pay your monthly amount it gets taken off the capital amount, so the amount you pay interest on will therefore reduce accordingly.

kthms

Thanks both! I assumed there wouldn't be much in it & the lower rate/annual interest option would involve staying with my current mortgage provider so I think I'll pursue that and see if I can save on any charges (deeds release etc)

Thanks!

SternMusik

patman99 wrote: »

Don't forget, with annual percentage all the money you pay each month only gets deducted from the capital amount at the end of each 12 months. The interest is calculated before the money is deducted. So you will pay interest on all the money you paid in over the year.

With daily interest, every time you pay your monthly amount it gets taken off the capital amount, so the amount you pay interest on will therefore reduce accordingly.

I don't think this is strictly true. It all depends on the small print. Interest can be calculated daily (taking into account any payments made) but be charged to the account at the end of the month or year. This happens with many savings accounts, for example.

With daily compounding, interest is calculated and charged to the account daily.

kim142

I have been looking at our mortgage in more detail because our financial circumstances are about to change and I have asked my mortgage company for copies or all my statements and letters. I agree with patman99. On the covering letter I received from my mortgage company they had inserted a paragraphs saying

'INTEREST TYPE
We charged you interest on your mortgage using our annual interest method until 31st January 2011. After that we charged you interest on your mortgage using our daily interest method.'

I will be contacting our bank tomorrow to query it because as far as I was aware we have always been on a daily interest mortgage. I would imagine it makes a huge difference to how much interest we pay in total.

Thrugelmir

SternMusik wrote: »

With daily compounding, interest is calculated and charged to the account daily.

Normally calculated daily , charged monthly.

So compounded monthly.

Daily compounding would result in a horrendous rate of interest.

DavidLaGuardia

SternMusik wrote: »

I don't think this is strictly true. It all depends on the small print. Interest can be calculated daily (taking into account any payments made) but be charged to the account at the end of the month or year. This happens with many savings accounts, for example.

With daily compounding, interest is calculated and charged to the account daily.

But unlike savings accounts many mortgages DO work on an annual basisi, and until quite recently it was the norm. Which is precisely why those who charge daily/monthly show this

SternMusik

Thrugelmir wrote: »

Normally calculated daily , charged monthly.

So compounded monthly.

Daily compounding would result in a horrendous rate of interest.

My mortgage has daily compounding. It doesn't make much of a difference to the interest rate, compared to monthly compounding.

Say the headline interested rate is 3%. With monthly compounding, the effective rate is equal to (1+0.03/12)^12 -1 multiplied by 100 = 3.042% (where "^" denotes "to the power of"). With daily compounding, it is (1+0.03/365)^365 -1multiplied by 100 = 3.045%. (Using 366 days for a leap year makes very little difference.)

Thus the difference between effective interest rates with monthly and daily compounding is 0.003% in this example.

SternMusik

DavidLaGuardia wrote: »

But unlike savings accounts many mortgages DO work on an annual basisi, and until quite recently it was the norm. Which is precisely why those who charge daily/monthly show this

I am under the impression that monthly compounding is the norm now. The T&C for my mortgage stated very clearly that interest was compounded daily, although I failed to find a reference to this on the lender's website.

I once rang a different bank (Nationwide) trying to find out exactly how they calculate interest (as I couldn't find the information regarding compounding anywhere). After speaking to seven different people, the best Nationwide could come up with was "well, how much interest you pay depends on how much money you owe and the rate of interest"..... (Really?? Don't you say!)

Thrugelmir

SternMusik wrote: »

I am under the impression that monthly compounding is the norm now. The T&C for my mortgage stated very clearly that interest was compounded daily, although I failed to find a reference to this on the lender's website.

Compounded or calculated. There's a fundamental difference in terminology.