Is my mortgage company calculating my interest correctly?

chirpchirp

In June my interest rate changed. My mortgage company have calculated the interest differently for that month compared with other months. Is this normal practise as it means I pay an almost an extra £10 than if it was calculated using the normal method. The rate took effect on the 1st of the month thus meaning the whole month was at the new rate so I see no reason why they needed to use a different formula. Interest on the mortgage is supposed to be calculated on a daily basis

The mortgage company have stated that the mortgage has been calculated using the following formula:

Interest is normally added as

capital x interest rate divided by 12

However, on months when interest rates change it is calculated as days and not as a fraction of a month. This is done using the following formula:

capital balance x old rate divided by 12 (A)
then an adjustment is made:

capital balance x difference between two rates x 30 divided by 365 (B)

then b is taken from a.

This means I pay approximately £10 more for that month than I would pay by there normal means of calcualting interest.

Does anyone understand this? Is there anyway I can progress this further as I still believe I'm being overcharged by about £10 when they use this different way to calculate interest.

Is this normal practise? Do I have reasonable grounds to object?

[Deleted User]

Are you saying then taking an example:-
Mortgage payment at old rate say £500 per month
Mortgage payment at new rate (for first month) £560
Mortgage payment at new rate (for 2nd and subsequent months) £550

Obviously these are just fictional figures but is this the sort of thing that is happening?

chirpchirp

Thanks for replying CR10 yes, that's the sort of thing which is happening and will happen each time the rate changes even though it took effect for the whole of the month.

getmore4less

Is this normal practise? Do I have reasonable grounds to object?

2 questons

1. Not normal, my interest is calculated daily, on the daily capital ballance, and added once a month.

2. What are you objecting to? the terms you signed up to? NO.

Are you sure this is daily interest, what you describe

Interest is normally added as

capital x interest rate divided by 12


is not daily interest.

chirpchirp

My T&C's say it's daily interest. I am told by the mortgage company that the amount payable only changes when an interest rate changes and they have told me that they calculated the change as I outlined above.

I would have thought the formula for calculating daily interest would have been:

Capital x interest rate divided by 365 x the number of days in the month.

However, I can see why they work it out divided by 12 as presumably they want to collect the same amount by direct debit each month, although I also see your point that this isn't daily interest.

My mortgage is interest only although I overpay each month. The company only change the amount which I owe them each time the mortgage rate changes so even though I may owe them ( random figures being used here) £100 in interest they would take £249 if this was the mortgage rate hadn't changed since I had been paying them £249 although they would apply £149 off the mortgage and £100 as interest. It all seems a very odd way to do this.

On my statement there was no decrease in the amount of interest I owed them each month apart from when the interest rate changed. I rang to check that they were applying the interest owed was going down with each overpayment and they confirmed this by giving me the figures they had applied for each month. This resulted in me finding out that the June payment had been calculated differently to July, August, September, October, November and December's payments as outlined above.

Getmoreforless I'm objecting to them using two different ways to calculate my mortgage for whole months. Also they use a formula for calculating daily interest which is different to formula which I would use to calculate daily interest.

CLAPTON

chirpchirp wrote: »

My T&C's say it's daily interest. I am told by the mortgage company that the amount payable only changes when an interest rate changes and they have told me that they calculated the change as I outlined above.

I would have thought the formula for calculating daily interest would have been:

Capital x interest rate divided by 365 x the number of days in the month.

However, I can see why they work it out divided by 12 as presumably they want to collect the same amount by direct debit each month, although I also see your point that this isn't daily interest.

My mortgage is interest only although I overpay each month. The company only change the amount which I owe them each time the mortgage rate changes so even though I may owe them ( random figures being used here) £100 in interest they would take £249 if this was the mortgage rate hadn't changed since I had been paying them £249 although they would apply £149 off the mortgage and £100 as interest. It all seems a very odd way to do this.

On my statement there was no decrease in the amount of interest I owed them each month apart from when the interest rate changed. I rang to check that they were applying the interest owed was going down with each overpayment and they confirmed this by giving me the figures they had applied for each month. This resulted in me finding out that the June payment had been calculated differently to July, August, September, October, November and December's payments as outlined above.

Getmoreforless I'm objecting to them using two different ways to calculate my mortgage for whole months. Also they use a formula for calculating daily interest which is different to formula which I would use to calculate daily interest.

what has the monthly charge/payment got to do with whether they work the interest out on a daily basis?

chirpchirp

Clapton, you are asking a very direct question but I'm unclear exactly what you are asking.

It's not a question about whether they are working out the interest on a daily basis ( my response was in relation to the question asked previously). I'm concerned about why they are using different formula to calculate the interest and whether they are using the right formula when they are calculating daily interest.

I'm having trouble understanding why my June interest is more than the amount that Locoblades spreadsheet calculates it to be. It's out by more than £9 but less than £10. The mortgage company have explained it as being due to the different way they calculated interest rates that month. I don't understand why they are using different formulas for June and September when they both have the same number of months and both were being charged at 1.49%.

getmore4less

chirpchirp wrote: »

My T&C's say it's daily interest. I am told by the mortgage company that the amount payable only changes when an interest rate changes and they have told me that they calculated the change as I outlined above.

I would have thought the formula for calculating daily interest would have been:

Don't confuse the amount you pay with how the interest is calculated.

Many lenders only recalculate the payment on "events"
Examples are
change of interest rate.
One a year.
certain capital payments.

Some allow the payment to stay the same if it goes lower etc.

Interest is how much gets added to the capital and when.
Most that do daily interest are added once a month(on payment date).


I know this may not answer your question without a detailed statement of your mortgage account.



With my mortgage I get a monthy statement with the daily ballance and interest payments so I can check they get it right.

chirpchirp

Getmoreforless, the repayment is only calculated with a change of event. Unfortunately my lender doesn't give a monthly statement just an annual statement which only shows the payment due, the amount paid and the overall amount paid and balance now outstanding. My balance outstanding was out by approximately £10 from the amount that Locoblade's spreadsheet suggested. This is why they have written to explain that they use 2 different formulas to calculate the interest. Normally (although supposedly daily interest) they calculate by capital times x interest divided by 12. But with the interst rate change they calculate that month differently - this is the part which I am having problems understanding.