Day count conventions – an overview
When taking out a mortgage, you'll come across the term 'day count convention'. But what does this term mean? Comparis provides an overview of the various day count conventions along with an illustration.
19.04.2022
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1. What is a day count convention?
The term 'day count convention' refers to a method for calculating interest. It indicates the number of days over which interest is calculated. Swiss banks calculate mortgage rates in two different ways.
2. International day count convention
The international method is more expensive than the national one. This is because it calculates the interest based on the actual number of days in the year. Accordingly, the interest rate is multiplied by 365 or 366 days and then divided by 360 days.
Calculation for calendar year: interest rate x 365/360
Calculation for leap year: interest rate x 366/360
Interest is a charge for borrowing money. The interest rate expresses this amount as a percentage. Mortgage borrowers owe their bank this amount for being able to access a mortgage.
As a general rule, mortgage rates are negotiable. Comparis provides an overview of mortgage interest rates by term and lender.
3. Swiss day count convention
The Swiss method assumes each month has 30 days in it. This results in 360 days per year. Accordingly, borrowers pay 5 or 6 days less interest per year.
Note: the German day count convention is not used in Switzerland.
4. Illustration of national and international day count conventions
Let's say you take out a mortgage for 600,000 francs at an interest rate of 1.4% over 10 years.
Calculation using the international day count convention
When calculating according to the international day count convention, the interest payable in a leap year is: 600,000 × 1.4% (366/360) = 8,540 francs.
In a normal year, the interest payable is: 600,000 × 1.4% × (365/360) = 8,516 francs.
If there are three leap years, you pay a total of 85,236 francs for 10 years.
Calculation using the Swiss day count convention
The Swiss day count convention is always based on 360 days in a year. When calculating according to the national day count convention, the interest payable per year is 600,000 × 1.4% × (360/360) = 8,400 francs.
So you pay a total of 84,000 francs over 10 years. This is 1,236 francs less than if you use the international day count convention.
5. Which day count convention is used where?
In Switzerland, most mortgage lenders work with the national day count convention. There are a few exceptions, however. Therefore, it is essential to check which one is used when you request quotes.
This article was first published on 26.10.2021