Interest Calculation on Mortgage

[rupertlssmith]

Hi,

 

I have been looking over the last 6 months mortgage statements, and I am struggling to understand how my bank calculates interest on my mortgage. What is the most common method of calculating it? Daily interest?

 

I have quite a good rate, 3.19%. By my reckoning the daily interest is:

 

(1 + 3.19%)^(1/365) - 1 = 0.0086035929%

 

Interest is added at the start of the month, and my payment is taken on the 10th. Looking at December as a 1 month sample, the balance is at:

 

278111.73 for 2 days.

278841.99 for 7 days.

277482.31 for 22 days.

 

The reason the balance is 278111.73 for 2 days at the start of December, is that Monday is the 3rd, and the interest is not added until the next business day. The balance drops on the 10th, when my payment is taken.

 

Calculating the daily rate on each of those days and adding it up, I get £741, but the amount I was actually charged is £752.86. I have tried calculating the interest a number of different ways, for example the annual rate/12 for a monthly rate, or using a compound equation as above for the monthly rate. Whichever way I do it, I am always at least 10 quid under what the bank charges me.

 

The thing is, I do not know how my bank actually calculated this.

 

Do they have to tell me exactly how they calculate it? Should I challenge their interest calculation, if so how does one go about doing that?

 

Many thanks for your help and interest.

 

Rupert Smith

[ims21]

Your mortgage agreement should tell you how the interest is calculated and when it is applied.

 

Some banks calculate interest daily and apply it to the account monthly.

 

Some banks operate on a 360 day year.

 

If you haven't got your agreement or need clarification then you can always write to your lender and get clarification as to how they in particular calculate and apply interest.

 

Only when you get the precise method will you be in a position to challenge them if necessary.