Understanding Compound Interest

N6xxy

Please bear with me....

I need to remortgage at the end of next month and looking at my options.

I have been given a mortgage offer of 2 years at 4.48% fixed but am toying with the idea of a variable mortgage.

In terms of variable mortgages as I understand it they calculate interest daily over the 30 days after your mortgage payment? So is there anything stopping me paying small extra amounts each month to re-start the accrued interest? Sorry if that does not make sense. So if i made a payment of £5 on day 5 after the initial months payment would interest re-start at 1 again on the lower sum?

Do Banks put tools in place to stop these sort of loopholes?

Thank you, sorry I really struggle with understanding finances.

Appreciate any info
Thank you
N

ACG

Pretty much every mortgage charges interest daily - the amount of interest added will vary from month to month, partially because of the number of days in a month differs and partially because the balance comes down each month. 

But yes, overpaying (usually up to 10% pa) means you no longer pay interest on that part of the mortgage as soon as the overpayment is credited to the account. 

That is the same regardless of fixed or variable. 

N6xxy

Thank you very much for your reply, so potentially £1 a day can make a difference to a variable?

Altior

It's not absolutely clear what you mean by 'variable' mortgage.

Do you have a link to the product?

Interest is calculated on the capital balance. If you overpay then you will reduce the capital balance slightly faster than the originally scheduled repayments. However, overpayments of circa £30 per month aren't going to make a tangible difference, and there is no need to fragment this to tiny daily additional payments.

ACG

I dont really understand the question. Maybe take a look at an overpayment calculator - https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/ - You cant do £1 overpayment a day, but you can do £30 a month. 

It does not matter if your mortgage is fixed or variable. Your variable rate is generally fixed for at least a month as lenders do not normally review rates daily or weekly and they also generally give you some notice. 

Altior

I believe N6xxy may be referencing a tracker, or less likely but possible, offset. Hard to believe they are considering svr, unless they are moving imminently, or some other unknown but critical variable!

N6xxy

Sorry I think it's my understanding. When I think of a fixed mortgage I believe you pay a fixed amount each month incorporating the agreed interest and when i say variable i mean following an amount above the BOE base rate so it's changeable. 

I thought compound interest meant that you accrue a daily interest charge each day until a payment is made, so my logic being if you paid £1 each day, that interest would not accrue?

DullGreyGuy

N6xxy said:

I thought compound interest meant that you accrue a daily interest charge each day until a payment is made, so my logic being if you paid £1 each day, that interest would not accrue?

No, you accrue interest every day irrespective of if payment is made or not... just how much interest you accrue will go down as the payments are made and the capital is reduced. 

Altior

The Bank's base rate doesn't come into it directly, unless you have a tracker. 

SVR is the Standard Variable Rate. It's the fall back rate for the bank and you won't want this unless you have no other option, as it will nearly always be higher than any fixed rate you can achieve at the time. 

You could save £1 a day, and overpay £30 per month. which will fractionally reduce the capital balance. But the impact on the interest calculation is literally pennies.

If you can access them, you would be better off putting £30 a month in a 5-7% regular saver, and using the lump sum to overpay after the year and the RS has matured. 

N6xxy

Thank you very much for your replies. Much appreciated

TheMilkmansDad

my understanding is that interest would be added on a daily basis on whatever the balance is on any given day. The rate would be 1/365th of the agreed mortgage rate.