# Calculation of Weighted Interest Rate based on Outstanding Debt

I would like to know what's the way on how to calculate the weighted average interest rate for a loan portfolio properly, especially when looking at periods shorter than a year. The basic definition is, that the Weighted Average Interest Rate = Interest Paid in Period / Total Debt.

I think the question becomes a bit clearer, when I use an example. Please assume a loan of 10000 and an annual interest rate of 5%, which should be paid back in 12 monthly installments. Based on this loan I would like to know the average weighted interest rate in each month. Based on the simplest calculation the annual weighted interest rate would be 5%. But I thought in case of a monthly perspective it is necessary to look at the monthly interest expense relative to the debt outstanding. That would mean the interest part of the repayment divided by the debt outstanding.

Period  Payment  Interest   Repayment   Debt Outstanding
1    856.07        41.67   814.41    9185.59
2    856.07        38.27   817.80    8367.79
3    856.07        34.87   821.21    7546.58
4    856.07        31.44   824.63    6721.95
5    856.07        28.01   828.07    5893.88
6    856.07        24.56   831.52    5062.37
7    856.07        21.09   834.98    4227.39
8    856.07        17.61   838.46    3388.93
9    856.07        14.12   841.95    2546.97
10    856.07        10.61   845.46    1701.51
11    856.07        7.09    848.99    852.52
12    856.07        3.55    852.52    0.00


That would for example mean that my weighted interest rate in Period 8 would be 17.61 divided by 3388.93, which would result in a monthly average interest rate of 0.0052.

Which is the correct way of calculating a weighted average interest rate, based on fixed-rate mortgages.