Does Your Home Loan Interest Get Compounded Monthly?

Hi everyone,

I was recently speaking to a friend and they where saying that their interest was charged and compounded monthly.
I did a quick search of the majors and they compound the interest daily and charge monthly so it seems that nowadays banks don't do this, so maybe they had an older type of loan?
Just wondering if anyone else on here has a compounding monthly loan? Not sure if this is relevant but I have a P&I and they have a I only loan.

Thank you.

Comments

  • +7 votes

    Never heard of compounded monthly.

    Mines daily, charged monthly as well.

    That's why offset accounts are important. They offset the interest, everyday.

  •  

    never knew of monthly compounding interest

    they've been misinformed ?

    •  

      They possibly have been misinformed and then not run the numbers themselves but they do not seem like that type of person. So I just thought if there is a loan that compounds monthly it will obviously be worth a look to take advantage of it.

  • +2 votes

    I think your friend is confused.

  • +3 votes

    Time to find another friend

  • +1 vote

    I think your friend may be confused due the way interest is shown on your bank statements.

    Banks will compound interest on a daily basis but they only charge it against your account once a month. This means that there is only 1 transaction on your statement every month for interest (rather than 1 every day) and is probably what led to your friend believing that they are only charged and compounded interest once a month.

    Offset accounts likewise work on a daily offset basis.

  • +2 votes

    Interest is calculated daily but it is not charged until the end of the month, so in that way it is calculated daily but compounded monthly.

    Interest is calculated daily based on your current balance, not including interest not yet charged to you.

  • +1 vote

    I have worked in banks for years, writing home load software . Afaik all banks charge daily, but the interest charged isn't applied until the month is up, so it does only compound monthly. You would be surprised how much a leap year makes in terms of extra revenue for a bank.

    Banks takes your lowest balance for a given day.

    If your interest was one dollar a day, that 30 dollars doesn't get applied till month due, so no interest paid on it till then.

    •  

      Banks takes your lowest balance for a given day.

      Make sense, this is fair for customer. For a moment, my mind was equating it to savings account, and thought why isn't it the same as savings interest (i.e. take closing balance). But then realise in this case bank is taking interest, savings is bank giving interest.

    • +1 vote

      Given your comment about the lowest balance on the day… Say you owe $70k on your home loan, if you get a $70k personal loan with the same bank, if both accounts allow free redraws and overpayments, could you just set up an automatic transfer between the two accounts for $69,999 and essentially pay 0% interest on the $70k indefinitely?

      •  

        when i say lowest, i mean the lowest amount in your offset. what i should have said is it picks your highest amount owing on a day.

        you wouldn't be the first customer to try this.

  •  

    I once opened 6c term deposit that at completion would become 6.6c hoping it would round to 7 changing a 7 percent (back when rates were this high) rate to 12.5 percent or so. Unfortunately it rounded to 6c

    Otherwise I would have opened lots of them

  • -1 vote

    Okay thanks for all your responses, I think judging from what everyone is saying on here it seems like my friend is just confused and there is no bank loan that compounds monthly. Thanks All :).

  • +3 votes

    Lots of people in this thread saying interest is compounded daily…never heard of daily compounded interest.

    AFAIK interest is calculated daily, compounded monthly and charged monthly.

    Compounded daily means, for eg loan of $100k

    Day 1: interest calculated on $100k of $1
    Day 2: interest calculated on $100,001 of $1.01
    Day 3: interest calculated on $100,002.01 of 1.011

    Etc etc until Day 30 when all of the daily calculated amounts are charged

    If that were the case the effective interest rate is definitely not the advertised rate

    Yall are making me doubt myself but still never heard of compounded daily

  •  

    Short answer: No, not really, unless you are talking amounts over six figures.

    I’ve seen so many people get hung up on this, I think it deserves a post. The easiest way to explain it is with an example. Let’s say ‘DaBank’ compounds interest daily on their accounts, and ‘MoBank’ compounds interest monthly. Let’s say you have a $10,000, 1-Year CD with both of them at the same 5% APR interest rate, and compare how much interest you have at the end of the year. Both credit interest monthly.

    Compare the rates of the Best Online Savings Accounts
    

    MoBank:
    Since MoBank compounds monthly, you are getting 5%/12 = .4166% every month. So, at the end of the first month, you will have 10,000 x 1.004166 = $10041.67. During the second month, you will be earning .4166% on $10041.67, not just $10,000. So at the end of the 2nd month you’ll have $10083.51, not $10083.34. This goes on for twelve months:

    $10,000 x (1 + .05/12)12 = $10511.62.
    

    DaBank:
    Since DaBank compounds daily, you are getting 5%/365 = .0137% every day. So, at the end of the first day, you will have 10,000 x 1.000137 = $10001.37. Using the same basic formula as above for 365 days:

    $10,000 x (1 + .05/365)365 = $10,512.67.
    

    So over the course of a year you’ve only earned $1.05 more by compounding daily versus compounding monthly!

    The easy way to not even worry about this is to just compare APY instead of APR.

    If you compare APYs, or annual percentage yield, the compounding effect is already taken into account, whether it be daily, monthly, or every 6.374 seconds. In our example above, MoBank would advertise a 5.12% APY and DaBank could advertise a 5.13% APY, with the same 5% APR. I hope that clears things up for some!

  •  

    Have a look at the calculator at http://www.instaauto.com.au

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