Interests “pre-added” to the principal

chryami

My bank proposes a very good fixed interest rate for my mortgage, but has a peculiarity that I have not heard for any other lender. They “pre-add” the interest to the principal. So for example, if I ask for 100 000 for 10 years and the total interest for these 10 years is 20 000, the initial amount of debt appearing in my account is 120 000 and the monthly instalment is 1000.
I think part of the reason for this odd presentation is to give themselves some room of manoeuvre in case of prepayment. I had in the past a small loan like that with them and the prepayment penalties (these are never presented as such, but they rather calculate a “return of interests for early reimbursement”!!!) were well exceeding the ones allowed according to the European Consumer Credit Directive.
Do they have any other incentive for this unusual presentation?
I don't live in the UK, I live in Luxembourg, but I believe the question can be of interest to you as well.

CLAPTON

the CCA regulations specify that all uk normal unsecured loans must give the total cost to be repaid i.e. loan principal pus interest (i.e. the 120,000 in your example); I'm not sure of the rules for mortgages but I would expect them to provide the total too.

chryami

Thanks Clapton. Would this mean that at the start of the first month, the opening balance on the loan account would appear as 120 000, at the end of it 119 000, at the end of the second one 118 000, etc?