Interest Rebate on Interest Only Mortgage

Diggger

Hi all

I am in the process of a Transfer of Equity on my home from my wife and I to just me.

I have been told that my settlement figure takes into consideration any interest rebate that we are due as we are not settling at the end of our payment month. This of course is joint money as it came from my wife and I yet being paid off the sum I have to re-mortgage for.

So my question is firstly about how an I/O mortgage is run by the provider. When you pay money in monthly installements (considering you pay in advance) does that reduce the balance of your mortgage, so that the daily interest then builds the loan back up to the original figure at the end of the month?

If so then does my settlement figure represent the actual loan value on the day of settlement? If so then why even mention an interest rebate as this is what is causing the confusion.

So can anyone enlighten me as to how i/o mortgages are run within a single month and what my settlement figure actually represents as regards how money has been attributed.

Hope you're not as confused as me now!

Ta

koexelek

The capital balance always stays the same with an interest only mortgage ( the amount you oroginally borrowed)
The interest is usually then charged on a daily basis, with most lenders having you paying in advance.

So if you owe £100000, and you have paid £500 on the 1st of the month, and you settle it on the 15th, you should get £250 back.

That is the way I understand it.

Diggger

So in your example if I settled halfway through the month I should gt £250 back but with a settlement figure of £100000.

If they then offset the two as they are saying this would lead to a settlement figure of £99750.

That makes sense but would mean that when I pay them a monthly, this figure is not directly offset against the loan but used on a monthly basis to offset the interest, ie that the actual balance on the last day of the month is £100500 but they have £500 of money accepted to offset this. I agree that the capital balance remains the same but is this based on the figure at the end of the month or every day of the loan?

I suppose another way of looking at it is, is the monthly based on the compund interest accrued on the full mortgage balance over the course of a month or is it based on the amount you need to pay off the full balance so that the monthly compund interest takes you back to your full balance at the end of the month, if you get what I mean.

koexelek

Confusing, isn't it ?

Most lenders now calculate the interest daily.
Therefore whenever you settle a mortgage , you don't lose out.

Usually, they want the interest paid in advance, so at the beginning of a mortgage you end up seemingly out of pocket, but you recoup this when you settle it.

Diggger

Yes it is confusing.

Even if they want the interest paying in advance, how does this affect your balance on a daily basis.

Example 1. Loan of 100000 monthly payment 500
NB interest amounts are wrong but just for illustration
Day 1 = 99500 + Interest = 99530
Day 2 = 99530 + Interest = 99575
etc until last day of the month
Day x = 99891 + Interest = 100000

This to me would mean that on Day 2 my settlement figue should be 99575 value of mortgage on Day 2. including any interest rebate.

Therefore as this is a transfer of ownership my wife would be entitled to (100000-99575) / 2. Sound right or have I still missed the point?!?

koexelek

I think that is sort of right.

The capital is always what you borrowed ( £100,000)

If you have paid £500 interest on the first of the month ( in Advance) then you settle on 15th, you have to pay back the full £100,000.... but they owe you £250..... so the settlement would be £99750