Mortgage interest calculations and overpayments

u0362565

Hi all,

I'm considering overpaying on my mortgage and wondered how others decide to do this. As far as i'm aware interest on the mortgage balance is charged daily. So if the annual interest rate is 1.97% and i want to know how much interest is added each day do i simply divide 1.97/365 = 0.0053% per day?

If this is the case then it seems to me it would be best to make daily overpayments because depending on your mortgage balance, each month could mean £100's interest added and you could circumvent this by not allowing the interest to accrue each day.

It may vary per lender but i assume there would be nothing stopping me setting up a daily overpayment? Does anyone else do this or are you happy to accrue some interest and make regular monthly overpayments instead?

Thanks for the advice.

HappyMJ

It's best to make a payment as soon as you are paid. If you are paid monthly then pay your extra payment on pay day. If you split the payment in to 30 separate payments you will pay more interest.

Interest does not compound daily. It's just calculated daily and compounds monthly.

At a rate of 1.97% I would not make any overpayments at all preferring to save the overpayments into a regular saver account earning 6%. In a year when the regular saver matures you can transfer that on to the mortgage and pay it off with more money. You'll save a lot more doing it that way. You could even save into current accounts earning 3% interest and use the interest to pay the interest that is being charged on the mortgage keeping the difference or using the extra to overpay a bit more. If you've got £10,000 earning 3% for 1 year you'll get £300 in interest whilst only paying out £197 in interest on the mortgage....i.e you can overpay an extra £103 in 12 months had you saved the money instead.

ViolaLass

Are you paid daily?

SternMusik

Interest may be compounded daily. It depends on the lender. The daily interest calculation is correct, except we are in a leap year and therefore it's divided by 366 not 365.

The difference between daily and monthly compounding is not as big as people may think. £10000 at 1.97% p.a. compounded daily for 30 days gives £10016.16, compared to £10016.147 with interest added at the end of the 30 days.

My mortgage provider compounds daily by the way.

u0362565

Ah I see, I need to find out from my lender when they calculate and compound interest but given the information learnt from these posts whether compounded daily or monthly it doesn't make that much difference to the balance.

I've only just read that current accounts are no longer subject to nearly as much tax as what they were, I don't fully understand how but I can see why a high interest rate current account is now so appealing.

Thrugelmir

SternMusik wrote: »

Interest may be compounded daily.

Highly unlikely interest is (charged and) compounded daily.

Calculated daily and charged monthly is the norm these days.

ViolaLass

Even if it were compounded daily, unless you're paid daily, you save more by overpaying as soon as you're paid.

SternMusik

Thrugelmir wrote: »

Highly unlikely interest is (charged and) compounded daily.

Calculated daily and charged monthly is the norm these days.

I'm with YBS, and interest on my mortgage is compounded daily. I'm tracking my mortgage with a spreadsheet (interest calculations and everything). Definitely daily compounding.

Trying_to_be_good

Overpay as soon as you're able to to save the most money - as others have said, only overpay daily if the money is coming in daily!

pollyanna24

SternMusik wrote: »

Interest may be compounded daily. It depends on the lender. The daily interest calculation is correct, except we are in a leap year and therefore it's divided by 366 not 365.

The difference between daily and monthly compounding is not as big as people may think. £10000 at 1.97% p.a. compounded daily for 30 days gives £10016.16, compared to £10016.147 with interest added at the end of the 30 days.

My mortgage provider compounds daily by the way.

My bank doesn't charge for the leap year day. Never has. The balance just stays the same for that one day only.

Katykat

Jumping on the back of this post, could anyone throw any light on this one? My daughter has 8 yrs left on her mortgage & is trying to pay it earlier. She has no disposable income once she has paid her bills on the first day of each month. If she paid ( say 1st June for eg) and then started paying 25% of her mortgage every week, always in credit, would she then pay her mortgage earlier because of the daily interest charge?