This is the fairest method of interest calculation and the lender only charges interest on the mortgage balance outstanding. Once again the graph shows the amount of interest payable on a £100,000 mortgage over 25 years assuming a constant interest rate of 5.75% and you will see that the borrower on daily interest is actually £2,212.41 better off over the 25 year term.
Additional savings can also be made just by altering the date of the mortgage payment and if the borrower was to make this payment on the 1st day of every month as oppose to the last day monthly, (when lenders usually take the direct debit) then this would save a further £1,987.32 in interest and the mortgage would be repaid 3 months early.
Overall, borrowing on a daily interest mortgage makes the borrower almost £4,200 better off, rather than borrowing on an annual interest calculated mortgage as per previous example. This is because the monthly mortgage payment is generally being received 30 days early and the mortgage balance is temporarily reduced by the entire monthly payment which is made up of both the capital repayment and interest elements. The interest charged by the lender within the monthly payment is actually working for the borrower as well before it becomes due at the month end.