Broken Interest on 1st mortgage payment - clarification required

saineegan

Can someone please confirm what broken interest is in terms of the first mortgage paymet and whether it is better for any reason to 'complete' at any particular time of the month . I only ask because my building society seem to think it is better to complete at the end of a month as your first payment will consist of 1 days broken interest plus 1 whole payment .

I don't agree with thier view because surely broken interst is just pro-rata interst on a mortgage which you owe regardless of when you complete in the month, so in other words if you complete at the end of a month , common sense dictates that you pay less broken interst but your regular paymets come into play much quicker, and if you complete at the beginning of a month then you owe interest from a much earlier date, which means you will pay higher 'broken' interst for the first month.??

In other words- am I right in thinking that if your mortgage interest is caluclated daily then it makes no difference as to when you complete, as the broken interst you pay is what you owe for taking out a mortgage at a certain time in the month- you are not being penalised in any way for completing at say in the middle of the month?

Also if my regular monthly paymets will be are £530.18 then the first payment if I complete say the 8th of September will be 8th- 30th sept = 23days/30 days x 530.18= 406.47 Plus the whole of October at £530.18
Total £936.65

Thank you for your help

Tiddler_2

"Broken interest" or "initial interest" is charged on a pro-rata basis and so you are only paying for the number of days that you have had the mortgage facility, so you are right that there really is no best day to start the mortgage on, in terms of a new purchase.

It may be slightly different if you are remortgaging, as your existing lender may charge you interest to the end of the month, irrespective of what date you complete on, and so in such cases it is better to complete on the last day of the month so you are not paying two lots of interest for the same period of time.

Hope that makes sense.

The calculation you have done depends if your mortgage is on a repayment basis or interest only basis. They will only charge interest for the first part month that you have the mortgage. Also the calculation differs from lender to lender. The Halifax for instance calculate the payment based on the interest charged to the end of their financial year which is 31st Jan, and then deduct the amount of interest paid within your normal monthly mortgage payments.

So if you had a mortgage of £100k at a rate of 5% completing today the calculation would be.

100000 x 5% x 229 (days til 31/01/2010)/365 = £3136.99

SUBTRACT

100000 x 5% x 7 (whole months til 31/01/2010)/12 = £2916.67


So the initial interest would be £3136.99 - £2916.67 = £220.32

saineegan

Thanks Tiddler

All that you have said has made sense. As we're remortgaging, I didn't realise that the existing Lender - Nationwide may charge interest up to the end of the month irrespective of which day we leave them to start on the new deal. Do you happen to know if Nationwide do normally do this?