<h1>Daily vs Monthly Reducing Balance Methods: How Interest Calculation and Prepayments Affect Your Home Loan Costs</h1> Banks commonly use either daily or monthly reducing balance methods to compute home loan interest; the daily method recalculates interest on the outstanding principal each day and benefits borrowers by immediately reducing interest after any prepayment, while the monthly method recalculates once a month so mid-cycle prepayments do not lower interest until the next calculation. The daily method typically yields lower total interest, especially with prepayments, but many lenders use monthly for accounting simplicity. Borrowers should confirm the contractual calculation method, compare effective borrowing costs (including fees and prepayment charges), and model scenarios rather than relying solely on headline rates.