Mortgage Capitalisation Time Period Explanation

B

Bonafides

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Hi,

Please forgive me if this question has already been asked and addressed.

I have a performing mortgage with my current lender who have informed me that the interest is capitalised to my mortgage account on a monthly basis.

Could somebody please explain to me if this is more or less beneficial than capitalising, say, on a quarterly or weekly basis?

Could somebody please explain the impact/effect of such monthly capitalising?

Thank you all kindly.
 
Interest is calculated every day on the balance.

The balance at the start of the month is €100k - let's say that the daily interest charge is €10
the balance on the second day will be €100k
Let's say that they capitalise the interest at the end of each month.
So if you make no payment, the new balance at the end of the month will be €100,300
The interest the next day will be a little bit higher than €10

I think all lenders capitalise on either a monthly or quarterly basis.

It makes very little difference.

It will be set out in your loan agreement.

Brendan
 
Brendan,

Thank you for your prompt and helpful reply.

Am I correct to assume that capitalising in this way on a monthly basis, as opposed to a quarterly basis, is more beneficial to me as the borrower in circumstances where the accumulated capital balance (including additional daily interest) by every 30th day is paid off quicker (i.e. every month, as opposed to every quarter) and is therefore not allowed to accumulate to a higher figure which it would if it was allowed to increase over a period of 3 months instead of one month. [Presumably this is why people 'way back when' were permitted by banks to make fortnightly payments on their mortgage account, instead of only once per month as is currently allowed]

I hope I am being clear. Thank you for your time.
 
No, you are not correct.

It is the very opposite.

If they capitalised it on a daily basis, on the second day you would be charged interest on €100,010.
The third day you would be charged interest on €100,020. 10 c
etc.

So the longer they delay the capitalisation the better.

But don't worry about it. It's a tiny figure.

Brendan
 
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