Daily Rest and Monthly Rest Home LoansIf you are looking for a home loan then knowing the details of different terms and jargons used by the industry is very critical. Remember knowing only the basic terms like interest rates, term, monthly payments is not sufficient. There are lots of other terms you ought to know and understand fully to compare different home loan offerings. It can make a lot of difference to the amount finally payable by you.
One such term is “Rest”.
“Rest” determines the frequency at which your outstanding principal is re-worked and the interest due is calculated. Most of the home loan mortgages currently fall in one of the following four categories based upon the “Rest”.
Most of the home loans these days are either on daily rest basis or monthly rest basis.
- Daily Rest Home Loans: Here the outstanding principal is calculated on daily basis and your interest burden is reduced immediately on the very next day you make the payment. It is also known as Daily Reducing Balance Loan.
- Monthly Rest Home Loans: Here the outstanding principal is calculated on monthly basis.It is also known as Monthly Reducing Balance Loan.
- Quarterly Rest Home Loans: Here the outstanding principal is calculated on quarterly basis.It is also known as Quarterly Reducing Balance Loan.
- Annual Rest Home Loans: Here the outstanding principal is calculated on annual basis.It is also known as Yearly Reducing Balance Loan.
Advantage Of Daily Rest over Monthly Rest Home Loans
Daily Resting Home Loans are advantageous over Monthly Rest options in cases, when you are willing to pay some payments in addition to your due monthly payments. In such cases, your outstanding balance reduces immediate on the next day you make the additional payment resulting in lower interest amount payable.
In case, you only stick to your monthly schedule of payments and do not want to pay any other payment in between, then daily rest option is not going to help you any better than the monthly rest option.
When the Daily Rest is better than Monthly Rest
However, there is one fact, which might cause daily rest loan to be better than a monthly rest. The periodic interest rate in monthly rate is calculated as Annualized Rate / 12. On the other hand, the periodic interest rate in case of daily rest is calculated as Annualized Rate / 365, assuming 365 days in a year. This makes a little difference because 12*30=360 days only and so, the applicable interest rate in case of monthly rest is a little bit higher than the daily rest.
Online Loan Rest Calculator
Here we present you a online calculator, which will help you to understand and appreciate the differences in different “rest” options with live examples.
In this calculator, we are taking an example, where the loan amount is 10,00,000, the interest rate is 10% and the loan duration is 20 years. The total interest payments in the three options come out to be as follows.
- Annual Rest Option – 1,349,192
- Quarterly Rest Option – 1,322,084
- Monthly Rest Option – 1,316,052
- Daily Rest Option – Same as Monthly rest option.
As you can see that the Monthly Rest option gives you the smartest choice as you are required to pay the lowest of the three cases. The Daily rest options gives you the same results as the monthly rest option as we have already reasoned. Daily rest is beneficial only in cases when you are making extra payments in addition to the monthly EMI payments to partly or fully repay your outstanding balance and the dates of the repayments are in between your monthly payment due dates.
An Important Fact
Please bear in mind that it is not necessary that in the Annual Rest Option, you are required to make one single payment of 117,460. You will most likely be paying 1/12th part of this, i.e. 9,788 on a monthly basis. But since your outstanding loan balance is calculated after every 12 month period, your EMI (monthly payment) of 9,788 is much larger than the case of Monthly Rest case, where your EMI comes out to be only 9,650.
Similar is the case with Quarterly Rest option.