Overcharged on Monthly DD By Mortgage Lender

Tango'd

I have just found out from questioning my lender about my annual mortgage statement that they have been charging me too much each month for approximately 10 years! They set up two DD from my bank account one for the mortgage + buildings insurance and another one for the buildings insurance. They have apologised but as I have just redeemed my mortgage (following Martin's excellent advice) they say that it has reduced my final redemtion amount because the overpayments have been offset against my mortgage! Over 10 years the overpayment is approximately £2500. My argument is that I did not want to overpay each month, I could have used the money or saved it and earned interest on it. I was also (sadly) on a yearly interest basis and only changed before I redeemed (thanks to moneysaingexpeert) so the amounts I was overpaying each month were not offset against my mortgage until the end of each year. Please advise if you think my lender should compensate me for their overcharging and how much I could expect? Also I am now not confident they have calculated my redemption and monthly payments correctly so can anyone help with the formula to calculate this? Thanks

---lee---

Firstly, welcome to the forum :T

Tango'd wrote:

I have just found out from questioning my lender about my annual mortgage statement that they have been charging me too much each month for approximately 10 years! They set up two DD from my bank account one for the mortgage + buildings insurance and another one for the buildings insurance.

Obviously they made an error but it’s a little surprising and remise of you not to notice for 10 years!

They have apologised but as I have just redeemed my mortgage (following Martin's excellent advice) they say that it has reduced my final redemtion amount because the overpayments have been offset against my mortgage! Over 10 years the overpayment is approximately £2500. My argument is that I did not want to overpay each month, I could have used the money or saved it and earned interest on it.

Because lenders always charge more interest for loans and mortage than they ever offer for savings accounts and similar products, it’s unlikely that you could have earned more interest than you have saved by putting the money in a savings account. So really, you have probably not done to badly out of this. The 2.5K that you have paid will have saved you a lot of interest over the term of your mortgage.

I was also (sadly) on a yearly interest basis and only changed before I redeemed (thanks to moneysaingexpeert) so the amounts I was overpaying each month were not offset against my mortgage until the end of each year.

That's a shame about the annual interest but that's down to the product that you selected.

Please advise if you think my lender should compensate me for their overcharging and how much I could expect?

I find it surprising that they did not consult you on what should have been done with the overpayment - as you said earlier, you would have preferred it back in a lump sum rather than offset against the mortgage – even though that would have saved you the most money.

Clearly they made an error and the least they could have done was consult you on how to put it right. It worth looking up the direct debit guarantee to see what help if any it can offer. You should also request information on the formal complaints procedure from the bank/building society so that you can start a complaint.

Also I am now not confident they have calculated my redemption and monthly payments correctly so can anyone help with the formula to calculate this? Thanks

It should be easy to see if your redemption statement is correct. The first thing to do is make sure it includes all your payments (including overpayments) and that the correct interest rates are being applied throughout the term. You can also work out how much your mortgage would be if the overpayments had not been made by taking off the overpayments each year and recalculating the interest payments. Beyond that I’m struggling to put it into words so maybe someone else can give a better description!

jamesd

Tango'd, the first calculation is the total value of the extra insurance direct debit payment. If this was a fixed amount you can get this basic value by multiplying the amount by the number of months. 2500 would match this for 10 years/ 120 months if the extra payment was 20.83 a month.

However, that is not enough to set things right because it ignores interest you would have saved on the mortgage or earned if you had put the money in a savings account. Assuming 5% interest for 10 years 2500 would be about right for a payment of 16.03 a month. However, 5% interest is probably too low an average value and this would reduce the monthly payment that would make 2500 an accurate correction.

Since you have paid them the money it seems that the best correction would be to treat it as an overpayment on the capital of your mortgage. That would reduce both the capital and the subsequent interest payments. For this calculation to be fair they should also assume that you had placed the money in one of the best savings accounts and then made a payment just before the annual interest calculation. A reasonable approximation of this interest is the average savings interest rate that year times 6.5 times the average monthly payment that year.

For example, if the average interest rate for the year was 6% and the monthly payment was 15 the total extra reduction in capital before the interest calculation would be 0.06 * 6.5 * 15 = 5.85. Add the 12 payments of 15 and the total reduction in capital for that year would be 185.85.

If your monthly payment was more than 16 a month it seems unlikely that they have correctly calculated the reduction. If it was less, there's a chance that it was right, but it's not certain.

To give you an accurate answer we'd need to know the amounts each month and the mortgage interest rates you were paying at the time.

---lee--- wrote:

Because lenders always charge more interest for loans and mortage than they ever offer for savings accounts and similar products, it’s unlikely that you could have earned more interest than you have saved by putting the money in a savings account.

You can get more than 6% tax free from an ISA these days and that is more than the normal competitive mortgage interest rate by about half a percent. Any person overpaying on a competitive mortgage deal is losing money if they could put it into the best cash ISAs instead.

It's not an unreasonable approximation in this particular case to use the mortgage interest rate because those may be the easiest figures to obtain, but using them will not be sufficient to put the person back into the position they would have been in if they had used the ISA option. Increasing the sum by half a percent annual rate would be reasonable correction for the greater savings than mortgage interest rates.

If the poster would have invested the money instead, it's likely that they would be significantly better off than this savings situation and with even fairly cautious investments they would need an additional 2% a year to recover their loss, quite possibly more since that's a very coarse approximation that doesn't allow for the higher than normal gains made since 2001/2.