How is mortgage interest calculated: daily or monthly?
On the balance you owe, at the annual rate spread across the year — by the day, the month or the year, depending on the mortgage. On £200,000 at 5% that is about £27.40 a day or £833 a month. The method rarely changes the payment, but it decides when an overpayment starts saving interest.
The three methods
- Daily. Each day's interest is the balance × the rate ÷ 365. An overpayment reduces interest from the day it arrives.
- Monthly. Interest is charged on the balance at the start of each month, at one twelfth of the annual rate. An overpayment counts from the next monthly calculation.
- Annually. Interest for the year is worked out on the balance at a fixed date, and payments made during the year do not change it until the next one. Some mortgages still work this way.
Why it matters when you overpay
Take £10,000 overpaid in February on a mortgage at 5%. With daily or monthly interest it starts reducing interest within weeks. With interest set annually on 1 January, it does not reduce interest until the following January, so the ten or so months in between carry about £417 of interest the other methods would have saved.
The overpayment is not lost. It still reduces every later year's interest; it just starts later.
Why a statement wobbles
With daily interest, a 31-day month carries more interest than a 28-day one: about £849 against £767 on £200,000 at 5%, where a monthly calculation charges £833 in both. Over a year the totals come out close, but month by month a statement will not match a smooth monthly model.
The full model is set out in how we work it out.
Questions people ask
How do I work out one month's mortgage interest?
Multiply the balance by the annual rate and divide by twelve. £180,000 at 4.5% is £180,000 × 0.045 ÷ 12 = £675 for the month. A lender charging daily multiplies by the days in the month and divides by 365 instead.
Does daily interest help when overpaying?
It starts the saving sooner, because an overpayment reduces interest from the day it arrives. Over a whole mortgage the difference from monthly interest is small; the difference from annual interest is larger.