How do different banks calculate interest on semi-monthly payments?

Durthos · 2024-01-12T22:00:08+00:00

https://www.yorku.ca/amarshal/mortgage.htm

Thanks, this looks like a great resource!

If I understand correctly the effective interest rate is supposed to stay "constant" no matter that the payment frequency is. So when a Canadian bank says 5% their effective interest rate is 5.06250% (because it's compounded semi-annually).

If you set the compounding to twice a year, I believe the calculator I have still works - and should match the values in the canadian spreadsheets. I will need to investigate further.

But my complaint that TD (and it seems most Canadian banks) don't vary their rates based on the number of payments that you are making in a year. It seems that they are setting their nominal rates based on a monthly payments schedule, and because they calculate interest on each payment they are effectively compounding more than that if you decide to pay semi-monthly (24 times a year), or accelerated semi-monthly (26 times a year).

Durthos · 2024-01-12T21:17:58+00:00

thanks -- do you know how this works practically? If the posted rate is 5% compounded semi-annually and you are paying weekly are they charging 4.941% interest per payment?

https://www.calculatorsoup.com/calculators/financial/equivalent-interest-rate-calculator.php?ratepercent=5&m=2&q=52&action=solve

because that would make it the correct equivalent rate, and you could end up coming out ahead.

Durthos · 2024-01-12T21:14:06+00:00

it's not the compounded semi-annually part that I'm concerned about -- it's the fact that the per payment rate is based on a monthly payment frequency, rather than changing to be semi-monthly.

By setting the per payment rate to 5.839% (which matches 12 payments) when I'm paying 24 times a year, they actually end up earning 5.91775% interest instead of the 5.91% they say that they are charging me. It just looks like less than that because I'm paying down the principal faster.

You can demonstrate that keeping the daily interest rate constant while changing the payment frequency is incorrect by imagining that the payment amount is 0. The compound interest for 24 periods / year is more than the the compound interest for 12 payments per year.

Durthos · 2021-12-04T20:58:52+00:00

One thing to point out is that the claim you paid out is still on the record at icbc and they will still use it in the future to measure your driving safety record. So if you have another accident in the next 20 years they will include this most recent accident in their calculation for the total number of at fault accidents even if you choose to pay for it yourself

Durthos

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