Compound Interest Question

Vertuas

Hello

As my mortgage interest is calculated daily, can i set up a standing order to pay the monthly repayment in little bits on a daily basis. 7 pounds per day say?

This avoiding all compounding of interest as the interest (and a small amount of capital) will be cleared on a daily basis.

Are the lenders bothered about this kind of tactic, or do they get snotty because they are loosing the interest?

Even a weekly payment structure would save money over the monthly one!

Thanks

Vert

Jonbvn

AFAIK, most lenders in the UK specify that your mortgage payments can only be made monthly. In Australia, a lot of mortgage payments are done bi-weekly, which as you state, does reduce the interest.

Due to the massive impracticality of paying daily, I am sure no lender would ever even consider what you are suggesting.

CLAPTON

If you make 30 payment of £7 per month rather than a payment of 210 at the end of the month and the interest rate was 6.5% you would save about 56 pence per month.

sallyb17

I don't know how accommodating they would be for setting up a daily SO, but I regularly visit my branch and deposit cash there and I don't think there are any limits to how frequently I can do this, barring Sunday and Bank Holidays of course

I can only do this as it is convenient for me as I often pass the bank, or if not it gives me incentive to have a healthy lunchtime walk - paying off the mortgage and getting fitter at the same time!

Of course, I realise this would not be an option for a lot of people, but at the moment, it works for me.

InMyDreams

Vert,

"Daily interest miscalculation?" might be an interesting thread for you to read.

As far as your regular payments go, I know with my mortgage, even if I was to pay my monthly payment two weeks early, it just sits there and is not applied to the mortgage until the day it's supposed to be anyway, so makes no difference to the interest. It neither earns any nor reduces my mortgage balance until the day it is due.

If you are so keen to pay daily to make the most of the interest, why not pay into a savings account daily, then at the end of the month use that money to pay the mortgage, leaving your few saved pennies of interest in the savings account. Build up your little bits of interest in the savings account (which will also start compounding its own interest), then put it towards an overpayment at a later date. If the net interest you are earning in the saving account is the same as your mortgage rate, it will have exactly the same effect. But probably not worth it for the pennies per month it will save you. Also this would only make sense if your income was received daily too.

What should be possible though, if your main income is monthly (and it's something we have done) is to change the date of your regular payment to a few days after you are paid. This means the money is not sitting around in your current account for too long, and effects your mortgage as soon as you've earned it.

Kaz2904

It would save more money if you just switched your payment to the beginning of the month.
The only other reason for staggering your payments is that you will effectively be making a months overpayment somewher along the line.
The bi weekly mortgages make a payment every 2 weeks so 13 times a year whereas monthly mortgages only pay 12 a year.
The other way of this saving you money is to look at your shortest month and divide your minimum payment by 28 days.
This gives you your daily rate. Then you pay that every day. EG: my min payment is £649.75 / 28 = £23.20 per day. (£7797 a year) but £23.20 * 365= £8468 = £671 overpayment each year.
To be honest it's probably easier to set up a standing order for £56 per month.