Definition
Per Diem Interest
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Per diem interest is the interest charges that is due to the bank from the day of closing to the first day of the following month which is when the first payment of the mortgage is due.
This figure needs to be calculated as an extra payment because the original home loan repayment amortization schedule is calculated with a commencement that starts from the first payment.
This means that the time between closing and commencement of the loan would incur interest charges that are not accounted for.
For example, if a 30 year housing loan for $100,000 starts on 3rd June and closing way done on the 15th of may, the interest charges for the period between 15 May to 2nd June would be the per diem interest. And if the fully index rate rate on the loan is 2%, the amount would be [($100,000 x 2%)/365] x the number of days.
This interest expense would be paid by the borrower as part of the closing costs.
This also means that if the closing date is within the control of the borrower, then scheduling it a day or two before the loan commencement arrangement would be ideal.
It is also not unheard of for banks waive per diem interest charges if the amount is immaterial.
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