Difference between Monthly Rest and Daily Rest

Once a while, you may hear that this home loan product is on monthly rest and another is on daily rest. You hear people saying that daily rest loans are cheaper while someone else says they prefer to have a monthly rest housing loan. If you do not know what this means to your housing loan product, you really need to understand how it works.

But what do they mean? Here are some brief explanation.

  • 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 is that you do not have to worry about making instalments at a certain date, as long as the payment comes in at month end.

For example : For a RM100,000 loan at 7.50% interest per annum, monthly rest for a 20 year loan. The monthly instalment is RM805.59, paid on the 20th of the month.

Month 1

Outstanding loan RM100,000

Interest charged RM625.

Monthly capital repaid : RM805.59 – RM625 = RM180.59.Outstanding loan at month end : RM100,000 – RM180.59 = RM99,819.41

  • Daily rest

To a large extend, a daily rest loan product can provide significant savings to your loan, if operated properly. Your loan interest will be calculated based on the previous day’s outstanding balance. The advantage for daily rest is that you have a chance to save more if you like to make lots of pre-payments or capital payments on top of your regular instalments. The disadvantage is, 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 instalment. You may even end up paying more if you tend to maintain your accounts in perpetual arrears throughout the whole financing tenure.

For example : Same scenario as above

Month 1 (30 days)

Outstanding loan amount : RM100,000

Daily interest charged until payment on 20th: RM100,000 x 7.5% x 20 days / 365 days = RM410.96

Daily interest charged from 21st to 30th: Calculated based on reducing loan amount = RM205.18

Total Interest Charged : RM410.96 + RM205.18 = RM616.14

Additional capital repaid : Monthly Instalment RM805.59 – Monthly capital payment RM180.59 – Total Interest Charged RM616.14 = RM8.86

Loan amount outstanding : RM100,000 – RM180.59 – RM8.86 = RM99,810.54

Savings: Month 1 interest savings : RM625 – RM616.14 = RM8.86; this amount is used as additional capital repayment which reduces the following month (Month 2) opening outstanding loan amount, thus reducing the Month 2 interest further as interest is calculated based on a lower outstanding loan amount.

Please note that most banks now offer their homeloans in daily rest calculation, with monthly rest products still maintained by products under the Islamic Banking banner. However, I expect that soon Islamic Banking products will also offer daily rest products on a larger scale as more and more products developed under the banner become more innovative.

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26 Comments (+add yours?)

  1. Syakirah
    Oct 06, 2008 @ 17:01:53

    Thank you, you’ve been a big help 🙂

    Reply

  2. annualcreditreport.com
    Jan 19, 2009 @ 00:37:37

    I am amazed with it. It is a good thing for my research. Thanks. ^_^

    Reply

  3. Carlos
    Jul 29, 2009 @ 17:03:33

    Thanks a lot for the info. ist very helpful.

    Reply

  4. wan
    Aug 04, 2009 @ 19:26:59

    Hah, wondeful xplanation!
    Good points.

    Reply

  5. Cat
    Oct 25, 2009 @ 21:40:46

    How you get RM205.18 in daily rest calculation? I got RM204.67

    Here is my calculation:
    Monthly capital repaid
    = 805.59 – 410.96 = 394.63

    Loan Amt Outstanding
    = 100,000 – 394.63 = 99,605.37

    Interest from 21st to 30th
    = (99,605.37 x 7.5% x 10) / 365
    = 204.67

    Would you help? Thanks a lot.

    Reply

    • Amir
      Mar 21, 2010 @ 03:26:09

      Sorry this took so long. To be honest, I didn’t remember the earlier calculations, but now I can recall.

      Banks can calculate your interest amount based on several ways, as defined by their internal systems. My calculations were based from the system calculation from one of my previous banks, and the interest is calculated based on the number of days in the year for 364 days. That gives me roughly RM205.23 for such calculation.

      Some banks use 360 as the basis of calculation, and some calculate based on 365, or based on the year (366 for a leap year). Minor amounts will vary the installments.

      Ask your bank what was their basis of calculation. As you can expect, if they use 360 days, you will be paying a bit more interest.

      Thanks.

      Reply

  6. evelyn
    Nov 18, 2009 @ 09:44:55

    is monthly rest = monthly effective interest rate.?
    do they mean the same thing..

    Reply

    • Amir
      Nov 23, 2009 @ 18:43:27

      Hi Evelyn,

      Monthly rest means the way the interest is calculated (at the end of each month) to determine the yearly rate e.g. 10.0% per annum calculated at monthly rest.

      Monthly effective interest rate cound be the per annum divided by 12.

      Is it the same? Depending on definition, I personally think it leads to the same thing, although not exactly the same thing. In terms of meaning, monthly effective interest rate can be determined by a monthly rest calculation. The best way for me to explain is that, the instalment is calculated based on a monthly rest, and the instalment has an effective rate of x.xx% based on the tenure of financing.

      Are there anyone else that could explain it better? I don’t mind getting inputs. Hope it doesn’t confuse you too much…

      Reply

  7. Monthly Rest Vs. Daily Rest Interest Calculation
    Apr 23, 2010 @ 10:33:25

  8. zam
    May 14, 2010 @ 09:34:01

    Good and simple explanation on th daily rest and monthly rest calculation. Thanks a lot.

    Reply

  9. deli
    May 17, 2010 @ 21:46:53

    good info for beginner like me to buy new house. anyway, which bank offer better
    1. A bank: BFR – 1.9% (daily rest)
    2. B bank: BFR – 2.1% (monthly rest)

    Reply

    • Amir
      May 18, 2010 @ 02:47:26

      Hello Deli,

      Off hand, package B is better, because you get instant savings. But then, you have other things to consider… how would you like to pay for your monthly instalments? Do you intend to settle early your HL i.e. planning to sell or to make a lot of capital repayment? Most importantly, on what day of the month will you make your housing loan instalments? Is it on the first week of the month, middle of the month, 20th, 21st, 25th or 26th of the month? How is your repayment track record, are you always on time or sometimes late for up to 1 month?

      All this depends on the type of person you are, and because of that, only you should make the decision whether its monthly or daily rest.

      Daily rest can be a double edge sword. Either you can save a lot, or it will cost you a lot. You save if you have the discipline to pay 1) early in the month, 2) consistently every month, 3) willing to make extra payments to take advantage of the daily calculation. But… if you don’t pay on time and start incurring late charges, the late charges is added to the principal on a daily basis, which incur a higher interest rate the next day, which will be added again to the principal the following day… until you make the payment. If you are late in your payments, you will pay more than a monthly rest loan, if you pay really early, it mean more savings.

      If daily rest is the best product for consumers, then why haven’t everybody switched to a daily rest product? Why does people still demand a monthly rest product? It is because of people like me still want a monthly rest product, where the interest is calculated on the end of last month’s outstanding balance, and not the compounded balance which includes the daily penalty. People like me, who gets paid at the end of the month i.e. 25th onwards, which does not benefit from a daily rest. I know I can never pay on the 5th or the 10th of each month, because my salary comes at the end of the month. I cannot afford advance payments, so a monthly rest is suitable product for me.

      Here, it is not about the pricing, it is about behaviour. I know my personality and what plans I have with my money, so a monthly rest product is the right one for me. But when I can start making early payments or many payments within the month, a daily rest offers the best savings.

      I hope it helps you to make up your decision. Choose the product most suitable to you.

      Cheers and good luck.

      Reply

  10. deli
    May 18, 2010 @ 08:30:02

    it’s hard to say since i wouldn’t know specific day that require me to pay. however, i’m kind of person that get pay 25-27th each month and settle all debts before 30th.
    seems like, we are the same more less. therefore, i think package B is better.

    what else that i can demand from the bank instead of profit rate?

    Reply

    • Amir
      May 19, 2010 @ 05:33:16

      Hi Deli,

      Demand? Hard to do, I guess. Housing loans are what bankers call “programmed product”, where the features are fixed and approved as is… and what you see is what you get.

      Whatever you can demand, if it is allowed by the “housing loan program” of the bank, you will get it. Not sure what you want to demand, though.

      🙂

      Reply

  11. deli
    Jun 01, 2010 @ 06:27:43

    currently, i got 2 banks offer, both BFR – 2.1% except bank A offer for the 1st 2 yrs, fixed at 3.5% and thereafter effective BFR – 2.1%. they claimed, 1st 2 yrs serve for profit only.

    is there any catch here?

    Reply

  12. Amir
    Jun 02, 2010 @ 07:00:48

    Sounds like a good deal for Bank A, huh? To answer your question as reasonable as possible, it depends on what you want to do and pay. It is good that you pay only the profit for the first 2 years, IF you don’t want to spend too much on your commitments in the first 2 years. But remember, as always, banks are not a charitable organization and you are right to think there is a catch. First 2 years serving profit only means for 2 years, your principal is not being paid or reduced. This means, the profit you are being charged for the 2 years will be based on the original loan amount. The net effect that, over the same period of time, you will pay more, because your financing effectively only starts on year 3; year 2 payments are just profit payments and goes nowhere to paying off the loan.

    In short, you pay less in the first 2 years but pay more for the rest of the remaining tenure. It depends on your strategy. If you are planning to use some money in the first 2 years (such as marriage, settling down, renovations, buying furnitures, etc), paying just profit will give you that small amount of cash to do these things. If you are not planning to spend big in the 2 years; my advice…. get Bank B.

    Have a think about it. You should be able to decide which is the best package. Good luck.

    Reply

  13. daily_rest
    Sep 17, 2010 @ 10:55:33

    For daily rest, does the daily interest from previous days get compounded into current interest calculation? eg for loan amount of $100k and interest rate of 5.0%, first day interest will be ($100k X 5.0% / 365 = $13.698). What is the amount to be used for 2nd day interest calculation? $100k or $100,013.70?

    Reply

    • The Hotspot
      Sep 23, 2010 @ 21:00:06

      Yes that is the case where the calculation for interest in based on 100,013-70. Daily rest is a double edge sword, where it gives you benefits if you pay early, but you may end up paying slightly if you don’t pay early. Depends on your payment behaviour… if you can make some advance payments, then you will see the savings. Otherwise, it can cost you more than a monthly rest loan.

      This is why there is still a hug demand for monthly rest products.

      Cheers

      Reply

  14. Deli
    Feb 02, 2011 @ 12:56:53

    Salam,
    Is there any such personal financing using daily rest? If yes, which one offer better, monthly/daily?…Plus, which bank offer that?…

    Reply

  15. loancalcs
    Sep 13, 2012 @ 08:31:51

    Understanding the difference between daily rest and monthly rest is an important thing, which every home loan seeker must pay attention to. It might cause significant difference in the final interest burden upon him.

    Thanks for the good article.

    Reply

  16. Shee Kah Keat
    Apr 01, 2014 @ 11:21:25

    can you explain to me what is the difference between monthly rest and daily rest when we are doing a late payment, better to show a illustration to me .

    Reply

    • Amir Alfatakh
      May 12, 2014 @ 19:46:00

      Well, When you talk about late payments, of course the daily rest calculations will result to be more expensive for you.

      For monthly rest, for example your loan is due on 4th of the month (car loan), and you only pay at end of month, the system will calculate : Amount due x penalty rate x 26 days.

      However, for daily rest, the system will calculate the late charges as: Amount due x penalty rate x 1 day. And the next day, it will calculate (Amount due+ late charges) x penalty rate x 1 day. So the amount is compounded daily. This might not look like a lot, but if the loan amount is big and the late payments goes into 2 months due, it will all add up to be expensive.

      Reply

  17. Pankaj
    Aug 24, 2014 @ 18:21:03

    As mentioned in above notes, the daily rest is expensive , if the bank consider the no. of the days in a year less than 365 (or 366 in a leap year)

    Reply

    • Amir Alfatakh
      Sep 01, 2014 @ 01:47:25

      Generally, the calculation is against 365 or 366 for daily rest. There are however, Banks that calculate based on monthly rest i.e. 30 days x 12 = 360 days. It will therefore, depending on month, be expensive on a monthly basis.

      But annually, the amount you are charged is the same.

      For example, for a RM100,000 loan with an annual rate of 4.0%, the interest charged is RM4,000

      If you have a daily rest calculation in January, the interest allocation is:
      RM4,000 x 31 days / 365 days = RM339.73

      If you have a monthly rest calculation in January, the interest allocation is:
      RM4,000 x 30 days / 360 days = RM333.33

      However, if the month is June (30 days), daily rest calculation is cheaper i.e. the interest allocation is:
      RM4,000 x 30 days / 365 days = RM328.77

      The point is, yes there is a difference in the month to month calculation, but the annual interest remains the same i.e. RM4,000.

      Reply

  18. Zolan
    Oct 08, 2014 @ 15:05:25

    May I know the difference between monthly rest and yearly rest? Which is better and how is the calculation.

    Reply

    • Amir Alfatakh
      Oct 11, 2014 @ 23:38:51

      The difference between monthly rest and daily rest is the number of days.

      For example, a yearly rest loan of RM100,000 with a 12% p.a. rate result in total interest amounting of RM12,000 per year or RM1,000 per month. The monthly instalment is therefore RM9,333 per month where the interest portion will always be RM1,000 per month.

      But for a monthly rest loan, it differs. Interest is calculated and charged based on the principal outstanding at the end of each month. Therefore, for a 12 months loan at 12% for RM100,000, the first month interest (January) is
      RM100,000 x 12% x 31 days / 365 = RM1,019. If you are paying RM9,333 as above, your principal portion for January is 8,313. Then for February, you will recalculate the interest based on a reduced principal (your principal is now RM100,000 – RM8,313 = RM91,686). The interest for that month will be RM91,686 x 12% x 28 / 365 = RM844. This is a big difference from the yearly rest interest of flat RM1,000 per month. Under monthly rest, your principal reduces monthly and is interest is calculated based on this.

      For daily rest, interest is calculated based on the daily principal amount. For example RM100,000 x 12% x 1 / 365 = RM33. If for example there is no payment made for the first 10 days, but on 11th, the instalment of RM9,333 is paid, the total interest will be: RM100,000 x 12% x 10 days / 365 = RM329 + RM91,686 x 12% x 21 days / 365 = RM633. Total interest is RM329 + RM633 = RM962.

      Of course the above numbers are not 100% accurate as I am being simplistic (usually a schedule needs to be generated to be precise), but just to show the difference in methodology to calculate.

      Reply

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