When it comes to mortgage interest rates these are usually based on annual rates, but the interest is calculated monthly. In simple terms, an interest rate is how much it costs to borrow the funds. You would assume when you pay your loan repayments monthly, the amount will decrease as total interest prices drop. But unfortunately, it doesn’t due to amortization.
Your bank will calculate mortgage rates in a way where you pay the same monthly payments, but a higher percentage of that will just be interest during the beginning of the term. Meanwhile, at the end of the term, you will repay a higher amount off the loan and the interest will be lower. The annual percentage rate (APR) is made up of the mortgage interest rate plus any other charges, fees, and discounts. The way most lenders work out your interest on a monthly basis and advertise the calculations of the annual rate.
If you have a daily interest mortgage or simple interest mortgage, the interest is worked out based on the number of days in the coming month and this is what’s added to your balance each month. With this, you’ll see your monthly balance decreasing which will take into account the amount you paid last month, and the amount of interest added for the upcoming month.
If you’re on an annual interest mortgage, your lender will calculate the amount of interest you expect to pay the following year by use your balance on 31st December of the previous year and divide that amount by twelve. Overall, there’s not a huge difference between daily and monthly interest. The only difference is between the longest and shortest month is usually just three days.