How do Banks charge interest ?
- Thread starter Zap
- Start date
My bank uses a 360 day year to calculate interest!
Seriously, it does depend on the bank. I used to work for a company that wrote mortgage calculators for banks. Before computers (and daily interest), banks used a 360 day year (30 day month) to make it easier for themselves. When the moved to computers, many just kept the same calculation rules because the audit department said they had to match what the original bank offer was.
We had a heck of a time "bug matching" our system to produce the same quirky amortisation schedule for the bank. There were a variety of methods so you should ask for a precise definition and an example before trotting off to your spreadsheet. The definition is probably in your contract, but an example would need to be obtained from the bank.
Have fun.
Jireh
We had a heck of a time "bug matching" our system to produce the same quirky amortisation schedule for the bank. There were a variety of methods so you should ask for a precise definition and an example before trotting off to your spreadsheet. The definition is probably in your contract, but an example would need to be obtained from the bank.
Have fun.
Jireh
I went into the detail when I found out, 12 months later, that the bank had been charging me a too high interest rate. I reproduced the interest calculations to ensure that they recalculated my payments correctly. I found that the bank (ANZ) used a 365 day year (even on leap years) on a daily minimum balance.
Hi,
I would be interested to hear from anyone that has an interest only loan that has equal monthly payments.
I am looking for examples of different calculation methods. For example Westpac calculates interest daily and compounds monthly. This means the interest only repayment can vary from month to month depending on the number of days in each month.
If you have a fixed repayment interest only loan please private message me.
Or if you are mortgage broker that knows of such please contact me as well.
Regards
Michael G
I would be interested to hear from anyone that has an interest only loan that has equal monthly payments.
I am looking for examples of different calculation methods. For example Westpac calculates interest daily and compounds monthly. This means the interest only repayment can vary from month to month depending on the number of days in each month.
If you have a fixed repayment interest only loan please private message me.
Or if you are mortgage broker that knows of such please contact me as well.
Regards
Michael G
Hi Michael,
I have a fixed interest only loan with Westpac. The interest repayments do vary from month to month.
The strange thing is that for May and July (both 31 days), the repayment amounts were different by 0.0016% - go figure.
I have a fixed interest only loan with Westpac. The interest repayments do vary from month to month.
The strange thing is that for May and July (both 31 days), the repayment amounts were different by 0.0016% - go figure.
Hi,
I'm mainly curious as to how the lenders manage overpayment and underpayment, for example...
- if the borrower pays less than they should then in theory the outstanding balance should increase (because the part of the interest that was not paid would be applied to the balance like it does with a principal and interest loan); and
- if the borrower pays more than they should, would this reduce the overall balance, and if this is the case, wouldn't this mean a recalculation of the repayments?
Michael
I'm mainly curious as to how the lenders manage overpayment and underpayment, for example...
- if the borrower pays less than they should then in theory the outstanding balance should increase (because the part of the interest that was not paid would be applied to the balance like it does with a principal and interest loan); and
- if the borrower pays more than they should, would this reduce the overall balance, and if this is the case, wouldn't this mean a recalculation of the repayments?
Michael
Most lenders calculate interest daily on the loan balance and bill you monthly at the end of your monthly cycle.
Rams does it differently and will bill you if you make a repayment, say by paying fortnightly. This means that it is adding the interest charges on (capitalising interest) to make a slightly higher daily balance for the rest of the month.
Read your mortgage contracts it is all in there.
Rams does it differently and will bill you if you make a repayment, say by paying fortnightly. This means that it is adding the interest charges on (capitalising interest) to make a slightly higher daily balance for the rest of the month.
Read your mortgage contracts it is all in there.
