HSBC Monthly Interest calculation weirdness

andykirwin

So I was trying to work out how much interest I would be charged in future months for my HSBC mortgage and I came across something weird in some previous month's when I applied my formula to them to confirm it was accurate (as I knew how much interest I had paid previously).

To begin with, here's my formula;

(Yearly Interest Rate ÷ 365 * Balance) * Days in previous month

E.g. The monthly interest for March 2021 on a mortgage with 2.5% interest rate with a remaining balance of £100,000 would be (2.5÷365*100000)*28

For this month (March 2021) it worked fine and came out with the exact interest HSBC had applied to my account. But on previous month's there were seemingly random ones where it was off by a few pence. I know a few pence doesn't seem important but I was using the interest from previous month's to calculate the remaining balance for the following month so it was throwing the whole spreadsheet off. 

After some Googling on what might be causing this I came across a post from someone asking in general why their mortgage payments vary from month to month. Someone rightly replied suggesting their provider must calculate the interest on the number of days in the month, hence they saw a lower amount of interest in March, as February only had 28 days. Further down someone mentioned it could be down the the Direct Debit date, specifically that it may have fallen on a weekend. This rang alarm bells and when I compared the months that were off I confirmed they'd all been on months where the previous 1st of the month was on a weekend. I also saw the same around bank holidays (like New Year's Day etc).

So there was my answer and I nearly stopped there and just accepted this fact. But then I started thinking. Why should that make a difference? The number of days in the month hadn't changed. And the following month did not have less interest to compensate for the higher interest the month before. So how is this justified?

In order to make the numbers fit I adjusted my yearly interest rate on the months with the discrepancy until it matched the interest I had paid. The amount varied again but this appeared to be due to the 1st of the month being on a Saturday, a Sunday or on a Bank Holiday weekend. I had to increase my yearly interest by between 0.0003% and 0.001% on these months. 

Can anyone explain this? I'm completely lost trying to understand it now.

ordnancesurvey84

I share your frustration. I have a Halifax Mortgage, it came with a handbook which explained exactly how the interest would be calculated each month, it even said how many decimal places to round each figure to and at what stage - yet my Excel spreadsheet is still off by a penny or two in some months - and I'd feel much too embarrassed to call Halifax to ask them to go through their working with me (not least because the person answering the phone wouldn't know).

getmore4less

IT will depend exactly how the lender does it.
They will also be rounding on the interest rate and payment and having adjustments for those 
My mortgage statements have had the odd 1p adjustment over the years.  

using your 2.5% 365days  and £100k
daily interest  £6.849315068493151

When you vary the number of days it moves by ~£6.85pd

when you vary the balance by  that interest on one of those extra days for the next 30 day month
~£0.014pm  difference

you can also have the added complication that they may use the option to add daily interest and compound that

Mine does daily interest, compound monthly with the complication the interest is on calendar months getting added on the 1st day and my payment is collected on the 16th so the daily interest changes part way through the month.

Thrugelmir

andykirwin said:

 The amount varied again but this appeared to be due to the 1st of the month being on a Saturday, a Sunday or on a Bank Holiday weekend. 

For the these days the balance owing will be higher. Until the monthly payment is credited to the account. Correspondingly as a result the amount of daily interest charged will be higher for these days. 

andykirwin

Thrugelmir said:

andykirwin said:

 The amount varied again but this appeared to be due to the 1st of the month being on a Saturday, a Sunday or on a Bank Holiday weekend. 

For the these days the balance owing will be higher. Until the monthly payment is credited to the account. Correspondingly as a result the amount of daily interest charged will be higher for these days. 

This wasn't quite it, as the differences between my calculated interest and what I was being charged was mere pence (between 3p and 7p typically, once or twice it was 10p). To add an extra day or 2 of interest on the balance before my monthly payment was taken out would have added £'s.

I think I have sussed it! They are charge me interest on my monthly interest when the Direct Debit is delayed because the 1st of the month was on a weekend or bank holiday. Dividing my annual interest rate by 365 and multiplying this by the amount of interest that month, then multiplying that by the number of days the DD was delayed, then adding this to the interest that month gets me very close indeed.

(Yearly Interest Rate ÷ 365 * Monthly Interest Amount) * Days DD delayed

E.g Lets say the Interest this month should have been £150 but the DD was delayed by 2 days because the 1st of the month was a Saturday, and assuming my APR is still 2.5%. ((0.025÷365*150)*2) = 0.02054794520547945205479452054795 or 2p. So the monthly interest would end up being £150.02.

Thrugelmir

Weekends and bank holidays have never been working days as far as finance houses are concerned. The DD by default will be taken on the earliest of the first of the month or the next working day. 

andykirwin

Correction...it is interest calculated against the DD amount less the monthly interest.

(Yearly Interest Rate ÷ 365 * (DD Amount - Monthly Interest Amount)) * Days DD delayed

getmore4less

On daily interest that would be how it is calculated.
On the outstanding balance on the day and that does not go down till the payment is credited.
Are you sure they have not added the interest so balance goes up a bit for those odd days.

andykirwin

The below resolves perfectly across 4 years of historical interest payments when factoring in weekends and Bank Holiday that might have delayed the DD transaction, so pretty sure this right now.

((Yearly Interest Rate ÷ 365 * Outstanding Balance) * Days in previous month) + ((Yearly Interest Rate ÷ 365 * (DD Amount - Monthly Interest Amount)) * Days DD delayed)