How Homeloan Interest Is Calculated?

islandgirl123 on 02/10/2018 - 10:46
Last edited 02/10/2018 - 13:32

I have recently settled my investment and owner occupied loans with Ubank. I was wondering if there have been changes to the way interest is charged in the last few years on home loans? On all my previous loans, interest was calculated on the daily loan balance and then charged monthly to the loan on the same date that I settled. But with a Ubank, they appear to have applied interest to the balance at the end of the calendar month even though the first payment isn't due until the 12th October. I assume they'll charge the remaining interest for 1st - 11th October when the first payment is due on 12th and then again at the end of October and so on?

Does this mean that I am paying more interest because they have added interest charges to the balance at the end of the calendar month instead of monthly on the settlement date, meaning interest is being calculated on a higher daily balance from 1st October - 11th October?

Ubank Loan example: A loan of 300k settles on the 12th of September. The repayment therefore isn't due until the 12th of October. From 12th Sept - 30th Sept the loan calculates daily interest charges on an unchanged balance of 300k. But then on the 1st of October, $600 in interest is added to that loan balance, so from the 1st Oct - 11th Oct the interest is then calculated on a balance of $300,600.

Previous lenders: A loan of 300k is settles on the 12th of September. The repayment isn't due until the 12th of October. From 12th sept - 11th October the interest is calculated daily on an unchanged balance of 300k and then charged to the loan after a month on the 12th of October, meaning daily interest has been calculated on 300k for the whole month and only applied to the loan balance once a month when payment is due.

Is my understanding of the previous loans accurate? Or has home loan interest always been calculated on a daily rate that includes the interest accrued to date not yet applied to the loan balance and is Ubank simply making it more clear?

EDIT:

Thanks all for your contribution. I confirmed with Ubank that they charge the interest at the end of every month and not on the settlement date. It does mean that they benefit for the half a month that the extra interest will sit on the balance, but the loan repayment dates can be changed to line up with the interest rates so if I do this the bank would only get a month or two in extra interest for those days (compared to my previous lenders) while the date changes are made. I’ve had quite a few loans in my time and this is the only time I’ve come across this. Different!

Financial Home Loan

Comments

  • HighAndDry on 02/10/2018 - 11:01
    +2

    I think your understanding is correct as far as I understand, though I'm only familiar with CBA home loan interest processes (who knows, maybe every bank has a different way of doing things).

    There are two ways around this that I can see - pay each month early before the repayment date, or honestly just take the $600 (interest) * 4% (interest rate) / 365 (days in a year) * 15 (days till month end) = ~$1 a month extra in interest.

    • islandgirl123 on 02/10/2018 - 11:23

      Damn, I was hoping I was wrong! That’s a pretty sneaky way of charging extra interest. Problem is the example I gave isn’t actual, the loans I took to them are over a million dollars. Multiply this way of charging interest on that kind of balance over several years I’m assuming it will end up costing quite a bit more than I thought :( thanks for your reply

  • Archi on 02/10/2018 - 11:34
    +5

    how homeloan interest is calculated?

    not in your favour

    • HighAndDry on 02/10/2018 - 11:59

      Ha! Well, yeah they're lending you their money. If you want terms in your favour… be the lender.

  • John Kimble on 02/10/2018 - 11:39

    Pretty sure they can't charge you extra interest. The relevant regulatory bodies would be all over it.

    Unless you've stumbled upon an error that no one else has realised in years (highly doubtful).

    Did you ask ubank?

    • HighAndDry on 02/10/2018 - 11:47

      It's not extra interest - it's just a different (but still very common and arguably also standard) way of accruing interest (end of month instead of monthly anniversary of settlement date), that just incidentally happens to cause a little more interest to be accrued in total.

      I don't even think the primary goal for the bank is to get an extra few dollars a month - I'm sure that's a bonus and the bank's not complaining - but it's far more likely that that just lines up with the rest of the bank's accounting processes easier or is easier to manage (i.e. - all their customers' interest accrues end of month, instead of on all different dates).

    • islandgirl123 on 02/10/2018 - 13:36

      Thanks John, yeah they’re definitely charging interest on the accrued interest before the repayment is due which is not the same as other banks, but I’ve just found out it can be avoided if I change my repayment dates to the end of the month so that they match the interest charge date :)

    • burningrage on 02/10/2018 - 20:10
      +3

      "Bank Error in Your Favor. Collect $200"

  • Seraphin7 on 02/10/2018 - 11:41
    +3

    I'm sure this was all revealed in the documentation provided to you at the time of your application/acceptance of the loan.

    My guess is that UBank simply charge interest on all loans at the end of the calendar month.

    Let's say your loans are for $2m at a rate of 4.00% p.a. The 12 days you are referring to come to ~$2,630 in interest. You are basically therefore saying that your loan will be this much higher "than it should be" for 12 days out every month (i.e. about 30% of the month). To put this the other way then, your loan will be 30% of $2,630 higher than it should be on an averaged out basis which comes to $789. You are therefore paying "extra interest" on $789 at 4.00% or $31.56 a year based on the assumptions made here.

    To put the above into perspective, the $789 a year on $2m worth of loans is effectively an additional interest rate of 0.0016% p.a.

    I can understand how this might appear to be a frustration, but the reality is that this difference from what you are used to actually makes precious little different in practical terms.

    • islandgirl123 on 02/10/2018 - 13:38

      Thanks for this! I found a workaround now (updated in my edit), but by your calculations it’s not much difference anyway. I thought it would be a lot more!

  • redforever on 02/10/2018 - 12:27
    +1

    'From 12th Sept - 30th Sept the loan calculates daily interest charges on an unchanged balance of 300k'

    I would have thought the interest would still be compunded daily but only shown once a month instead of just the balance of 300k on 12 september.

    Edit: https://www.finder.com.au/how-is-interest-calculated-on-a-ho…

    see the link above.

    • Seraphin7 on 02/10/2018 - 15:46
      +1

      This interest will be calculated daily and charged monthly. This is effectively monthly compounding.

      Daily compounding means that you are effectively charged interest daily and therefore will result in a slightly higher effective interest rate than if charged/compounded monthly.

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