How Do Banks Actually Calculate Interest?

zonra on 01/06/2018 - 16:01
Last edited 01/06/2018 - 20:47

Hi all,

I'm after some inputs, I just had a looked at my mortgage and some stuff doesn't adds up.

My understanding is that if you have, say, 70k in your variable loan acc, and 80k in the linked offset acc for the whole period of the month, there shouldn't be any interest charged.
Keeping in mind that there is always more money in the offset acc than the loan acc at all instances during the month (and the last month), why am I still getting charged interest each month (6 cents to be exact)?

The below is in bold to pre-empt those sort of commenters :)
The amount of 6 cents is negligible to me and isn't worth the effort and time, but it got me wondering if interest is being calculated correctly in my other loan accounts, as well as other people's accounts.

Before any "Have you called the bank and what did they say?" comments, no I haven't, but I'm planning to call them next week (Tuesday as Monday is a PH) only after I've gone through some of my past statements to see if interest is roughly on par with what it should be.

I understand that it's a complicated process how bank calculate interests but in my example it should be an absolute zero with no ifs or buts. Or shouldn't it?

FWIW I'm with one of the big 4.
Cheers

Financial

Comments

  • cypher67 on 01/06/2018 - 16:06
    -6

    Given it is only 6 cents, I would have spent the time you did on this post and actually email the bank. How banks calculate interest isn't going to explain why you were charged 6 cents.

    • zonra on 01/06/2018 - 16:35
      +3

      From the OP

      The amount of 6 cents is negligible to me and isn't worth the effort and time, but it got me wondering if interest is being calculated correctly in my other loan accounts, as well as other people's accounts.

      I’m after people who had the same experience and can shed some light on it prior to me calling the bank.
      If this isn’t you then I’m sorry.

    • Scrooge McDuck on 02/06/2018 - 18:24

      Given it is only 6 cents, I would have spent the time you did on this post and actually email the bank.

      Yes, as we've all seen, banks love to explain their errors to customers. /🚨🚨🚨SARCASM🚨🚨🚨

      How banks calculate interest isn't going to explain why you were charged 6 cents.

      Uuummm, I'm pretty sure that would completely explain it.

  • Marcsie on 01/06/2018 - 16:11
    -4

    Why don’t you ask the bank instead of asking people here ?

    • zonra on 01/06/2018 - 16:36
      +1

      From the OP

      Before any "Have you called the bank and what did they say?" comments, no I haven't, but I'm planning to call them next week (Tuesday as Monday is a PH) only after I've gone through some of my past statements to see if interest is roughly on par with what it should be.

      I’m after people who had the same experience and can shed some light on it prior to me calling the bank.
      If this isn’t you then I’m sorry.

    • subywagon on 01/06/2018 - 17:55
      +7

      Why didn't you read the post before making a condescending remark? People often like to know others experience in similar situations so they know what to expect…

    • Scrooge McDuck on 02/06/2018 - 18:29

      Why don’t you ask the bank instead of asking people here ?

      Why don't we shut down the forums?

      Everyone should sort out their issues alone. /s

  • trex on 01/06/2018 - 16:12
    +1

    Interest should be calculated on daily balances. Did the balance on your offset account ever drop below variable loan account balance for any days in the month?

    • tomsco on 01/06/2018 - 16:19

      That would be my only thought.

    • zonra on 01/06/2018 - 16:32

      No, apology if it wasn’t clear in the OP but the offset has been higher than the loan (by a few grands) for over 2 months, continuously.

  • Ocker on 01/06/2018 - 16:22
    +1

    Assuming the interest rate for the offset account is for 100% of the interest rate charged on the loan then there is no logical reason for the difference.

  • Thrawn on 01/06/2018 - 19:52
    +3

    Its probably cumulative rounding errors when it does multiple calculations

    • zonra on 01/06/2018 - 20:18

      That sounds likely to be the cause, thanks.

    • Donaldhump on 01/06/2018 - 20:32
      +1

      You could round 0 for a billion years it's still always 0, more likely a software bug imho

      • zonra on 01/06/2018 - 20:45

        Upon thinking about it some more, you are right.
        Given that at no point in the last 2 months did the offset dip below the loan balance (it’s been in fact always a few grands higher), there shouldn’t be any interest charged, roundings or not.
        I will call and enquire next week.
        Cheers

  • donotuse on 01/06/2018 - 20:03

    What specific bank are you talking about?

    My loan was with ING and it was fully offset and no interest was ever charged.

    Read the terms and conditions, there's a bit about calculating interest.

    My guess is it's just cumulative rounding.

    Maybe you should consider closing your loan account to save annual fees?

    • zonra on 01/06/2018 - 20:25

      Thanks for the input, I’m with ANZ.
      It does sound like cumulative rounding at this stage.
      I’m not in the position to close the account yet as I still have a substancial fixed loan acc with the same bank (2-part mortgage: 1 fixed 1 variable) and am nearing the end of the fixed cycle.

      • Donaldhump on 01/06/2018 - 20:30
        -1

        Rounding 0 is always 0, not a cummaltive rounding error.

    • zonra on 01/06/2018 - 20:32

      My loan was with ING and it was fully offset and no interest was ever charged.

      Btw this is exactly the sort of things I’m after. Thanks

  • Donaldhump on 01/06/2018 - 20:30
    +1

    According to a friend Banking software looks at your balance on last day of your cycle and then forward projects the interest you would pay taking daily compounding into the calculation. If no other transaction occurs it does not need to do anything. If any transaction occurs it then does adjustments from that day onwards, and repeat if more transactions made. This is just the algorithm to minimise processing

    In theory there is no reason to be charged 6c if you were always above the loan amount.

    6c would indicate you were under 18 bucks for the month at an average, or 540 ish for a single day.

    I'd ring them up and say despite the low fee, there is a bug in their software. Looks like they charged interest on a fee without recognising it was offsetted. Makes no sense though, seems like a glitch.

    You need to be at the royal commission

    • zonra on 01/06/2018 - 20:40

      Thanks for the detailed reply, seems a call is in order (not for the 6 cents, but maybe to enquire them re the possible glitch which may be affecting interest charged on my other account).

      In theory there is no reason to be charged 6c if you were always above the loan amount.
      6c would indicate you were under 18 bucks for the month at an average, or 540 ish for a single day.

      That’s what I believe too, offset balance has been a few grands higher than loan balance for more than 2 months, continously.

    • LordNiksidor on 02/06/2018 - 21:57

      Completely depends on your loan, mine is calculated daily (midnight) and applied on the last day at midnight. I've had a spreadsheet tracking every cent since inception. I've actually never picked up any error and so far all the rounding has been perfect. It's fixed though so it's a bit easier, it's meant to be 5.69% but I've actually been charged 6.68989998%… took me a while to figure out how exactly it was calculated though.

  • CheapskateQueen on 01/06/2018 - 21:44
    +5

    Are you sure it's interest and not a forced repayment of principal? I have several loan splits, some of which are fully offset.

    I get charged a couple cents principal repayment (I'm on IO). When i asked them about it they said it was because the account requires a payment of some kind. It's as automatic system thing. So over time I've paid off like $1.50 of my principal with these auto "interest" payments of a few cents

    • zonra on 02/06/2018 - 17:12

      Interesting point. Not sure if it applies to me as both mine are I+P loans. Cheers

  • Typical16-bitEnjoyer on 01/06/2018 - 22:46
    -6

    I’m after people who share bargains on Ozbargain, not share stupid questions that can be answered with a phone call, and can shed some bargains prior to me calling the retailer.
    This isn’t you and I’m not sorry.

    • zonra on 02/06/2018 - 00:31
      +2

      Wow did someone piss on your cereal this morning?
      This is the forum mate, one could post about his raspberry fetish if he wanted to.
      Now get off my post.

    • Scrooge McDuck on 02/06/2018 - 18:36

      I’m after people who share bargains on Ozbargain, not share stupid questions that can be answered with a phone call, and can shed some bargains prior to me calling the retailer.
      This isn’t you and I’m not sorry.

      You didn't have to read this thread. You need a deal on some self-control.

  • Ashbargin on 02/06/2018 - 09:43

    Is it always 6c? If the bank is SGB I believe it has something to do with the amount of days in the month. On one side of system (lending I think) it uses average days in the month, whereas the other uses actual days.

    • Donaldhump on 02/06/2018 - 20:03

      Wtf?

    • miwahni on 02/06/2018 - 23:53

      Could be wrong but I think you're referring to the way SGB sets repayments on IO loans. One full years' interest is calculated, and each months' repayment is one twelfth of the full years' amount. However the actual interest charged to the loan is calculated daily and charged monthly. As a result, some months (those with 31 days) the repayment is less than the interest charged, and in 30-day months the repayment is higher than the interest charged. In theory, by the end of the twelve month period the loan balance should be exactly what it was to start with, but it never is.

      Anyway, this would not account for the weird six cent charge, if 100% interest offset is maintained.

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