Interest Accrual Period

The interest accrual period describes the period in which interest is calculated by the lender.

There is no standardization of interest accrual periods.

Different lenders can have very different accrual periods for mortgages, Even different products and different home loans can have different periods.

For example, let’ take a $200,000 mortgage at 9%.

If the interest accrual period is annually, the interest at the end of the year is $18,000 (9% x $200,000).

If the period is bi-yearly, the interest would be $9,000 (9%/2 x $200,000) for 6 months.

If the period is quarterly, the interest would be $4,500 (9%/4 x $200,000) in 3 months.

If the period is monthly, the interest works out to be $1,500 (9%/12 x $200,000) each month.

If the period is bi-weekly, the interest would be $629.31 (9%/26 x $200,000) every 2 weeks.

On a daily period, the interest would be $49.36 (9%/365 x $200,000) every day.

From the example above, do notice that shorter accrual periods result in more periods in a year. Which in turn results in more interest over a year.

What borrowers must also take note of, is that the interest accrual period has no relation to the payment period.

This means that even though a mortgage might have a monthly repayment obligation, it does not mean that the accrual period is monthly by default.

The accrual period should be clearly stated in the loan contract.