Mortgage Interest - Compound Frequency

B

BusyAtMaths

Registered User
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Hi,

Do all Irish banks/lenders use the same compound frequency? e.g. annually, quarterly, monthly.
 
Any that I've seen are compounded quarterly. There was an exception with some of the building societies that had an annual rest.
You'll find it in they're T&C's very readily.
 
RedOnion said:
Any that I've seen are compounded quarterly.
Click to expand...

So if you make a capital repayment the day after the compounding done, you will get no benefit for 3 months? Doesn't sound right.

Some (most?)of the lenders actually post the interest every month, so they must be compounding it at least monthly.

Brendan
 
Ulster Bank do it daily. Definitely. I have a spreadsheet I use to keep an eye on my mortgage. And the amounts that UB charge each month map up with me calculating the interest daily.

It's pretty easy to keep a track of. This month I'll be charged €585 interest. If there was an extra day in the month I'd be charged €605
 
Brendan Burgess said:
So if you make a capital repayment the day after the compounding done, you will get no benefit for 3 months? Doesn't sound right.
Click to expand...
No, that's not what I meant. Interest is calculated daily on the daily cleared balance, but capitalised (compounded) on a quarterly basis.

AIB is definitely quarterly.
 
BOI appears to be calculating the compound quarterly, I only noticed this when comparing the lender's repayment amounts in the Amortisation Table.
 
Turns out it's not as standard as I thought.
For example AIB and BOI are quarterly. PTSB is monthly.

This should be factored into the quoted APR.
 
So, the higher the frequency the more capital is paid ? i.e. monthly is better than quarterly ?
 
RedOnion said:
Interest is calculated daily on the daily cleared balance, but capitalised (compounded) on a quarterly basis.
Click to expand...

This might be a question of terminology.

We are all agreed that interest is calculated on a daily basis?

If you have a mortgage of €365,000 @10% interest annually, you will be charged €100 today.

Tomorrow, you will be charged €100.0027

So interest is charged, compounded and capitalised ever day.

They might only show it once a month or once a quarter, but that is not relevant.

If you go to pay off your mortgage a week before the interest is due to be added, the balance due will be the fully compounded amount.

Brendan
 
Brendan Burgess said:
Tomorrow, you will be charged €100.0027

So interest is charged, compounded and capitalised ever day.

They might only show it once a month or once a quarter, but that is not relevant.
Click to expand...

The above is incorrect. You only start paying interest on interest after its capitalised (made part of the capital balance).

Brendan Burgess said:
If you go to pay off your mortgage a week before the interest is due to be added, the balance due will be the fully compounded amount.
Click to expand...

That's correct. Interest accrued but not yet capitalised is also due to be paid on early redemption.
 
Mortgage Interest is neither charged ,compounded nor capitalised every day. Mortgage interest is calculated daily(on the outstanding balance ) and posted to the account monthly or quarterly depending on your financial institution.As far as I'm aware all the old monthly and annual rest accounts are gone .
 
Using Karl's Mortgage Calculator (you can adjust the frequency in Settings)
Mortgage of €365,000
30 years
3%
Compound frequency Quarterly: Payment €1,537.38 per month, Total Interest €188,458.54
Compound frequency Monthly: Payment €1,538.85 per month, Total Interest €188,987.70

So yes, RedOnion, Quarterly is better.
 
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I thought the whole point of the APR/AER concept was that you can treat the APR rate as the annual compounding rate regardless of when they actually do it. The rate used for monthly/quarterly compounding would be different from the APR. Is that wrong?
 
Absolutely correct. The problem is when it comes to fixed rates, the APR calculation assumes reverting to a SVR at the end so it's pretty meaningless.
 
I have just checked my AIB mortgage statement, and it was not as I thought. They add the interest once a quarter.

Red - do you know how they calculate the interest on credit card balances? I had assumed it was compounded daily, but I assume now that it's charged daily but not compounded until the interest, if any, is charged to the account?

Brendan
 
Credit cards is treated the same way, accrued interest is debited to the account monthly.
Taking BOI as the example here as that's where my Credit card is.
 
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