Interest-only mortgage from Woolwich : how they rip you off

Tiana_2

Wanted to let you folks about an interesting challenge I have had with the Woolwich over the last few years. This is 100% accurate, I have it stated by the Woolwich customer service team in writing, and have been successful in challenging the Woolwich through the Financial Ombudsman. I would like to know if other mortgage companies run the same scam : I am told by an IT contractor who works in the finance industry that a lot do.

My other half is a contractor so cash tends to come in big lumps or very slowly : to offset this we decided to go for an interest only mortgage with a daily interest rate so we were paying the minimum monthly, and to overpay where possible to reduce the capital amount quickly ( we have some old endowments too) .

After about 2-3 years, I realised that debt was catching up with me faster than salary rises, so I started to try and sort out my finances, started to file all my paperwork, and really look at bills & statements. Imagine my surprise when I realised that despite having made all the interest payments (we thought) the mortgage sum owed was higher than the amount we took out originally!

I rang the Woolwich - after a few calls it turns out they had not taken the first interest payment because they hadn't sorted out the dd in time, they hadn't told us, had charged us for non payment, and were charging us interest on interest due. So, bit of discussion, sorted out, refund and off we go, now really focussed on repaying the capital. But the debt keeps rising up!:eek:

So loads more calls ( generally not returned :mad: ) lots of letters ( replied but definitely not answering the question I have asked :mad: ) and shouting at customer services for over 2 years finally elicts the answer :

1) The dd is calculated by taking the amount you owe on day 1, working out what the amount of interest is owed by day 356 and dividing by 12. So on a 28 day month, you pay more in dd than you owe for the month in interest - great! On the first 31 day month, you pay less than you owe in interest, and for the next month they charge you daily interest on the interest you owe, so then the next month's payment is smaller than is owed, so they get to charge you interest on the interest.....etc.

2) If you make an overpayment, they recalculate how much you will owe them over the life of the mortgage based on what the capital sum now is. Great start! However if you make your payment on day 15 of the month they run the calculation as follows :
- take the capital sum owed at day 1 of the month ( after you have supposedly paid off all interest of last month, see above...)
- take away the overpayment, which gives the new capital amount, work out the interest owed over the next 365 days, and off we go again with the new 1/12th dd payment.

Sounded just fine to me : until I realised that despite paying £1200 off the mortgage, my monthly payment had gone up!!!!! :mad: Not down !!!Why?

Because :
3) - Remember taking the sum owed at day1? But what about the 15 days of interest you have inccurred? Well, they don't add that into the calculation of your direct debit amount. But they do add it to your debt. And yes, they then charge you interest on the interest on a daily basis!!!! And if you don't make another capital repayment into the account, they get to charge interest on interest until they are forced to recalculate the mortgage again, after 365 days for your annual statement. So they get 365 days of compound interest.

I couldn't work out how to work out how much money they took from us over 5 years of mortgage, and the ombudsman was not willing to assist me in doing the calculation : they stated I had to prove the financial figures. I'd love it if any one can assist me to do a spreadsheet to work it out, although it is too late for me to get any further refund from the Woolwich, we have accepted a settlement just to get my stress levels down off the ceiling. But with a monthly interest only payment of nearly £1600, I'm pretty convinced they have had a good few ££££ out of us and I am not convinced we got it back:sad: .

If you have an interest only, overpayment type mortgage please check this issue out don't give them cash for free. If you make the overpayment on exactly the first day of the month you will not get affected by the compound interest charge.

roswell

Sorry either I have missed something here but i expect the only reason you got compensations was for the fact the first payment wasnt taken in time, im pretty sure thsi is how all daily interest mortgages work the interest accrues daily and is added at a set point in the month as woolichs payment date is the 16th of each month you will accumulate interest from 17th - 31 of the month and it is added on the 1st of the month, from the first till 16th you will accrue more interest and payment will be taken based on the amount + interest owed on the 1st of the month.

The nature of the product is that you will always owe the amount you borrowed and it will rise daily till you make payment for the interest charged.

if you are saying that you have made overpaments were these stipulated as capital overpayments if not they are probably in a reserve account attached to the mortgage (did you get a cheque book with the mortgage)

Tiana_2

I'll try and explain again : I apologise if I don't use the correct financial terminology but I am not great at maths and am still learning financial management! I'm going to use example illustrative numbers, because I am not good enough to work out the exact ones with a real amount. You are correct about the Woolwich using the 16th, again I was using an illustrative working day cycle as another mortgage provider may not use the 16th as their monthly cut date.

When I took out the mortgage I expected the following :

I get given a sum of cash to buy a house - call it £100 - which I will refer to as the capital lump sum. My expectation is that on an interest only mortgage over 25 years, as long as I pay ALL the interest amounts the Woolwich ask me for ON TIME, at the end of 25 years the capital lump sum that I will owe to the Woolwich will still be £100, and I will not owe any interest.

On a daily interest mortgage, I expect that the Woolwich charge me interest on day one of the mortgage on £100 - assume that this interest is £1. And on day two of the mortgage I now owe them £100 of capital lump sum and £1 of interest. At the end of day two, they charge me interest again - £1.01because I have not paid anything, so on the morning of day 3 I owe £100 of capital lump sum and £2.01 of interest. With me, so far? This carries on for a month.

Okay, then so at the end of the month, the Woolwich request by direct debit the total sum of interest I owe them, I pay it, and hey presto I should be back to a capital lum sum debt of £100 and £0 interest.And off we go again in month 2 with the same cycle.

Here's where it starts to go wrong :

Problem number 1 ( the minor one) :the Woolwich does calculate your debt and the interest you owe to them this way. However they do not calculate the direct debit payment they take out of your account this way. They calculate the amount of interest you will owe them if you don't pay off any of the capital lump sum in 365 days, divide it by 12 and then apply 1/12th as a direct debit each month. So in February, you pay more by direct debit than you needed to cover the interest amount you incurred. But in a 31 day month you actually pay less than you need to cover the interest incurred, so you end up paying interest on the remaining unpaid interest until the next month which is an "over pay" month.

The statement made by their customer service representative to me was "it's not accurate, but it all comes out in the wash over the course of the year." Somehow that doesn't make me feel good, and my husband assures me that actually it doesn't come out in the wash - we end up down by a few pounds at the end of the year.

Problem number 2 ( the BIG one for which I got compensation through the Ombudsman) :

I assumed that if I made a repayment on the mortgage one of 2 things would happen :

I owe a capital lump sum of £100 and as it's working day 27 of the first monthly cycle let's assume I owe £5 in interest. I make a capital repayment of £10.

This forces the Woolwich to recalculate the amount I need to pay by direct debit on a monthly basis. They do this in two situations a) when you make an overpayment, because it is a daily interest calculation and b) at the end of the mortgage year for the annual statement.

I assumed that they would either

a) take the £10 off the capital lump sum owed ( leaving me with a capital lump sum of £90) and add the broken interest for the month to the capital lump sum I owe to allow them to recalculate the amount I need to pay by direct debit, so total sum owed now is £95
or
b) take the broken interest for the month off the £10 ( leaving £5 ) and then take the remainder of the amount of the capital lump sum - leaving a sum owed of £95 and then recalculate the direct debit based on this sum.

They do in order to work out how much you owe them interest going forwards. But to calculate the direct debit amount they do C :

C) take the £10 off the capital lump sum owed on day one of the month- leaving you with a capital lump sum of £90 and work out the direct debit. They forget completely to take into account the broken interest from day 1 to day 27.

So, until either a) you make another repayment and force the recalculation or b) your annual statement comes due forcing the recalulation there is £5 of broken interest which you owe them, which they charge you interest on on a daily basis and which you are not repaying through direct debit, sitting there quietly growing as a debt.

The key to this problem is the difference in the method between which they calculate a) the interest on the amount of money you owe them and b) the amount of money they will take out of your bank account by direct debit to cover the interest you owe them. They are not the same, and it increases the amount of interest the bank claims off you!

As I said in the first post, I discovered this because made a repayment against my mortgage and my monthly payment went down about 3 months later I paid off another 2k of the capital and my payment went up!:mad:

I really want people to know about this because I believe it is WRONG that we are being ripped off like this, and if enough people make a fuss they will be forced to sort it out. Right now they are getting away with it because most people don't check their statements carefully - like me for years!:o .

johna999

Providing my hosue goes through i'll be starting a mortgage with the Woolwich. Though it is a repayment offset mortgage. So I shouldn't have this issue. I have put together a spreadsheet to calcluate the daily interest my real debt (mortgage minus the offset). Each day I have interest added to the loan so even thoguh I start with say 100k mortgage, after day 1 it increases by about £15 etc. So I go over the amount I borrow in the first month until my first payment goes in on the 16th.

However this has got me thinking. As they are a bank they will be clever with their calculations in anyway possible to maximise their earnings. So Do they scr*w me in anyway I haven't thought of? Would it be in my interests to pay a few hundred quid off my mortgage on day one so I don't go over the loan amount?

defender_of_the_weak

On a sort of related note;

How many people get a surrender value or transfer value that does not include any pence? Logic dictates this should be about 1 in 100 and yet seems far more prevalent than this. One company I know always used to round down because I queried this when working in their head office, and anecdotally I have been told of 3 or 4 more that may operate a similar practice.

Perhaps not being screwed in the great scheme of this more like having your wallet discretely fondled. Too small to be of interest to the individual, but pennies make whatevers and with enough of these it soon adds up to the chief execs Christmas party in Nassua

Tiana_2

johna999,

If you pay off any of your capital other than on the day the Woolwich pay off the interest you owe through your direct debit ( and make your repayment) as an extra repayment amount you will get hit by the second problem I talked about for the duration of that month. You may well find that you will be affected by it for the year until they recalculate your payment amount, but I don't know how the repayment ££s will affect it. It is inherent in the way their systems operate : their customer service rep called it " an inherent systematic flaw".

It was possible to spot on mine because it was interest only, as long as I paid all the interest the base sum owed should not be increasing - and it was increasing substantially each year. I just couldn't find out how to do the calculation to show the exact figure.

If you don't make any additional repayment, well , you may be affected by how they calculate and apply the direct debit amount over 365 days instead of the exact number of days interest is applied - then it's down to if you think "it'll all come out in the wash".I'm not mathematically literate enough to do the sums - my hubby is - (degree in applied physics & engineering) - and he was convinced it wouldn't.

Good luck. I wouldn't go back to the Woolwich if I was paid to now, not after their total lack of customer service response over 4 years - often months of phone calls without any coherent response. But I do understand that they look like they have the most competitive deals - I say look, because the additional interest charged to us made it less competitive than a higher APR. That's why we chose them in the first place.

Or you could take it, track if they are doing the same to you ( I don't know how the offset part affects it,you see) and then claim compensation. We did get a fair few £K. Depends how you deal with stress - I get really wound up and upset - its not something I want to do again.

jamesd

That's an interesting systematic calculation error by them on lump sum payments. The workaround: pay any lump sum at the start of the month, not at the end.

For the monthly direct debit calculation, it's simply wrong and should be varying each month based on the number of days. It's not too badly wrong if you have the money in a savings account paying interest close to the mortgage rate. Most people probably like the fixed monthly amounts.

ohmsoft

jamesd wrote:

That's an interesting systematic calculation error by them on lump sum payments. The workaround: pay any lump sum at the start of the month, not at the end.

For the monthly direct debit calculation, it's simply wrong and should be varying each month based on the number of days. It's not too badly wrong if you have the money in a savings account paying interest close to the mortgage rate. Most people probably like the fixed monthly amounts.

I know of very few lenders who change the monthly payment each time its an adminastrative nightmare....and as you say not the sort of thing customers like for budgeting - 1/12 is very often used.

As to the lump sums and timings, I'm sorry I've not had the oppertunity to really study your scenario, but as per a previous post - with Daily Interest you should benifeit from making lump sums earlier in the month as interest will accumalate if made during....

roswell

Johna999, By the nature that your offset even having £1 in your current account (offset account) will mean that you overpaying from the first day anyway as less interest will be calculated.

roswell

I think the 1 / 12 is the easiest to be honest, i can imagen the complaints if every leap year they charged customers more.

Tiana_2

Out of curiosity, does any one know of an excel spreadsheet which would allow me to calculate the differential interest incurred?

Thanks!