Re: Mortgage interest calculation -- daily interest

On Tue, 10 Apr 2007 10:02:07 GMT,
Ronald Raygun <no.spam@xxxxxxxxxxxxxxxxxxxxx> wrote:
Tim Woodall wrote:

On Mon, 9 Apr 2007 22:51:44 +0100,
John Boyle <john@xxxxxxxxxxxxxxxxxxxxxx> wrote:

No, you are compounding daily. I know of no institution that does this.

http://www.oneaccount.com/onev3/faqs/toa-faqs-calculated.html

Interest is calculated daily so you only pay interest on what you owe
that day.

Selective quoting. Naughty! The next paragraph reads:

"We'll apply interest to your account once a month by adding up the interest
charges for each day and debiting the total from your account."

which demonstrates conclusively that daily compounding does not happen.

Actually they do something most peculiar. I've just gone back to the
three first statements for my NatWest One account.

For the first month there is an opening balance and one cashpoint
withdrawal. The interest rate was 5.1% for 05/05/04-06/05/04 and 5.35%
from 07/05/04 to 25/05/04.

Doing the calculation Interest=Amount outstanding * IR/365 and I get a
total of 209.36 interest - The statement says "The total interest on all
your borrowing covering these periods is 209.36. We will collect this
from your account on 21/06/2004.

I then did the same calculation for the following month. This time my
calculation gives 302.54 while the actual amount charged is 303.38. The
only way I can make these balance is to charge interest on the 209.36
interest from the previous month on every day from 25/05 to 21/06 when
the amount is actually deducted from my balance. Ditto for the following
month.

It's not completely consistent; for my calculation I need to charge
interest on the 209.36 interest for 25/05/04 which is the last day of the
statement but I don't need to charge interest on the 303.38 for 27/06/04
which is the last day of the next statement.

Whether they actually do a simple interest calculation or a compounded
daily calculation I can't tell. But according to the interest rate they
quote they are charging interest on interest that hasn't yet been
debited from the account.

Calculating the equivalent daily compounded rate and doing the
calculation that way I can't get exact agreement with the statement
figures but I'm out by 30p, 80p and 40p in the first three months (on
total interest of 700GBP) which is closer than if I don't include the
interest on interest on the simple calculation. There's no obvious
rounding that will "fix" these differences.

Tim.



--
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and there was light.

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