Mortgage Interest Calculations - Help!

lawrencesummers

Hi,

Can anyone explain to me how banks calculate the Interest that's applied to my mortgage?

I know the rate and the principle, but the amount on my statement monthly makes no sense and varies every month.

I was under the impression that the rate is applied to the balance annually - ie 5% on 100k is 105k and you make 12 payments of 1k so your opening balance the year after is 100 + 5 - 12 = 93K?

Or is the interest calculated monthly - but that makes no sense because some months the amount is higher and others its lower, i would have thought the amount decreased every month!

This is arising because my bank increased my Fixed rate by 1.1% about a year ago for no reason an I want to calculate the overpayment myself because they are a bank and can't be trusted!

Anyone able to give me a crash course?

Nickla

Interest is calculated daily -I have no idea why the fixed rate would change - unless you finished your fixed rate term or were on a tracker rate

alias no.9

We have two mortgages, one with BOI and one with AIB. Both accrue interest quarterly. If I look at the last interest payment on the AIB Account, the rate is fixed at 2.35%, divide that by 4 to get 0.5875% multiplied by the principal on the day and I'm within a euro of the interest charge. The discrepancy may be that there are slightly different numbers of days in a quarter.

tnegun

It depends on when it's charged to the mortgage account too, mine is calculated daily but charged quarterly. It's also compound interest, so you pay interest on it throughout the year too. Put the figures and rates in here and see do they make sense https://www.drcalculator.com/mortgage/

JVince

It almost best to ignore the monthly changes during the year as they add interest once a month whereas its calculated on a daily reducing balance basis.

To work it out, use an amortisation calculator. https://www.calculator.net/mortgage-amortization-calculator.html

You say the bank changed your fixed rate - that would be very strange. One thing that the tracker mortgage scandal showed is that most people don't actually understand mortgages and how rates are applied.

My guess is you had a fixed rate from the date you started. This would have a time limit - 1,3,5 etc years. When that fixed rate ends you revert to the banks standard variable rate or some other rate that they laid out in the terms and conditions. You can also fix again at whatever fixed rates are available currently.

I would get the "banks can't be trusted" attitude out of your head. There is so much oversight on them these days that they rarely take even a tiny step out of line. My guess is there's something that you are not understanding and a read though your loan documents will most likely give you the answer

lawrencesummers

I fixed for 10 years in 2022.

In 2023 the rate increased by 1.1% which is a significant amount. I have phoned them and they have no paperwork / reason for the change. I presume I’m going to get fobbed off with “technical error” but I want to try and get a figure myself of what they owe me / need to reduce the balance by.

coylemj

https://www.boards.ie/discussion/comment/123259400#Comment_123259400

Simply dividing the annual rate by four ignores compounding. For the quarterly rate, you get the fourth (1/4) root of the annual interest rate plus one (1.0235). Which yields 1.005824.

In Excel, that would be ((1.0235)^0.25)

Which means that your quarterly interest is 0.5824% Whereas, as you say, dividing 2.35% by four yields 0.5875%.

But you say that the quarterly interest rate is 'multiplied by the principal on the day'. That's not how it works if you're making a monthly repayment. Effectively (I stress effectively) what will happen is that interest will be accrued monthly, just before your repayment is made. And the monthly rate will be 1.0235 to the twelfth root. In Excel, that will be (1.0235^(1/12)) or 1.0019376.

So if you're calculating the interest in a spreadsheet, you need to add interest each month to the balance at the rate of 0.19376% (or just multiply the balance by 1.0019376) and then deduct your monthly repayment.

alias no.9

https://www.boards.ie/discussion/comment/123260452#Comment_123260452

All perfectly correct and can be taken to an infinitesimally small time period for interest calculation and build spreadsheets.

Any single interest payment can however be calculated to a very close approximation by the method I've outlined above.