How to Calculate Loan Interest Monthly Rest and Daily Rest?

If you have purchased house before then you may hear that the home loan is calculated on monthly rest and another is on daily rest. But, nowadays most banks calculate your mortgage interest based on daily rest. Have you even heard people saying that daily rest loans are more cheaper? If you do not know what this means, then you really need to understand how it works.

Here are my brief explanations.

i) Monthly Rest

Your loan interest for the current month will be calculated based on the previous month’s outstanding balance (which consists of principal and interest not paid, if any).

The Advantage of Monthly Rest

You do not have to worry about making installments at a certain date, as long as the payment comes in before month end.

Example: For a RM100,000 loan at 4.05% interest per year, monthly rest for a 30 years loan. The monthly installment is RM481, paid on the 20th of the month.

Month 1
Outstanding loan amount: RM100,000
Interest charged: RM481
Monthly capital repaid: RM481- RM337.5 = RM143.50
Outstanding loan at month end: RM100,000 – RM143.50 = RM99,856.5

ii) Daily Rest

Your loan interest will be calculated based on the previous day’s outstanding balance. Based on my personal calculation, a daily rest loan product can provide significant savings to your housing loan.

The Advantage for Daily Rest

You can save more if you like to make lots of pre-payments. However, because your interest is calculated on a daily-basis, your late interest may also be calculated on a daily-basis if you miss an installment. You may even end up paying more.

Example: Same scenario as above

Month 1 (30 days)

Outstanding loan amount: RM100,000
Daily interest charged till payment on 20th: RM100k x 4.05% x 20 days / 365 days = RM221.91
Daily interest charged from 20th to 30th: RM110.95
Total interest charged: RM221.91 + RM110.95 = RM332.86
Additional capital repaid: RM481 – RM143.50 – Total interest charged
= RM4.64

Outstanding loan at month end: RM100,000 – RM143.50 – RM4.64 = RM99,851.86

So, month 1 interest savings is about RM337.50 – RM332.86 = RM4.64; and this amount is used as additional capital repayment which reduces the following month opening outstanding loan amount, thus reducing the month 2 interest.

Overall, daily rest is much more better because of the flexibility of making more payments. Sometimes you might have additional cash and want to make more payments to reduce your interest.