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.

Interest charges are sometimes presented base on the following:
1. Daily rest; interest is accrued daily on the principal sum outstanding.
2. Monthly rest; interest is computed on a month to month basis.
3. Year rest; interest is computed at the beginning of the year.

• 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 installments 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 installment 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

Monthly capital repaid : RM805.59 – RM625 = RM180.59.Outstanding loan at month end : RM100,000 – RM180.59 = RM99,819.

• 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 installments. 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 installment. 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 Installment 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 home loans 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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