Help with Monthly Versus Yearly Interest Rates

olsen

I have just checked my yearly mortgage statement, and noticed that the balance after 3 years of repayment was £600 higher than my own calculations did show.

Looking further into that, I realised that the monthly interest added by Santander was simply the yearly (5 years fixed first buyer) 5.99% divided by 12 and not what I was taught in school (in Scandinavia) 1.0599^(1/12) as you will add interest of interest with the first method, and this means the banks yearly interest is not actually 5.99% as stated, but closer to 6.02%.

I am given the APR of 5.7 percent for the 14 year mortgage on the basis of some fictional future variable rate of 4.24%, but has not got to do all calculations to see if this is done in the manner I believe is correct, (but have checked that the total repayable sum mentioned in the documents actually tie up with my calculations of all payments now done on the divide by 12 method)

If the bank is correct in what they are doing, shouldn't it be clearer in the agreement?

kingstreet

The APR is of no use to you.

It takes into account the fees at the outset and makes an assumption the SVR will remain the same throughout.

Did you check if the interest was calculated daily or annually? What does your key facts illustration, mortgage offer and terms & conditions say?

olsen

thanks -I did find it strange that the bank bothers to put that completely guesswork APR on-
On the original details, it just says "A fixed rate of 5.99%" and in the next section it goes on with the irrelevant overall comparison information.
On my yearly statements, there is a sheet with the 12 past months, and where interest is added, and payments subtracted each month. Each monthly interest sum is calculated as 5.99% / 12 of the balance of that particular month.

kingstreet

Abbey/Santander calculates interest daily, but charges it monthly on its current products. You may have something done at a time when there were still annual rest products available.

If you are dissatisfied, you need to contact them.

On the APR and other issues on the KFI, these are prescribed by the FSA and are designed to help to compare between different products.

olsen

Thanks, would you know if Santander would say 5.99% / 365 when calculating daily (summing the daily interests up and adding monthly), or would they use the 1.0599^(1/365) i.e. actual 5.99% yearly?
-Before I complain, I would like to know what as seen as common practice in the UK.

kingstreet

No idea, sorry.

On daily interest, it works out the interest on the debit balance and that would rally only change once a month, after the monthly payment is received.

On annual interest, it works out the interest on one day in a year, then it divides that by 12 to get the calendar monthly payments for the coming year.

Annual rest used to be common, but has now been superceded by daily calculation as lender systems have become more sophisticated. Some smaller building societies may still use annual rest.

olsen

As my mortgage has just been up for renewal, I have been looking at this post again and contacted Santander.
I received a letter recently from the bank stating they are simply dividing the yearly interest, in this case 5.99%, by 12 (this ties up to the penny with my own excel calculations and the yearly bank statements), i.e. 0.00499% per month, and not what I believe is correct 0.004486, as the first adds up to 6.16% on a yearly basics, due to interest on interest, which in my case has cost me just under £1000 over 5 years.
I was only able to do the maths after my first yearly statements, as the bank could not tell me how much I would owe them after the fixed 5 years, when I took out the mortgage.
Most banks and online calculators seem to just divide the yearly interest by 12, but does that make it more correct? I still haven't been able to find anything in writing saying the method is legal, as I believe it is false marketing.

TrickyDicky101

You are simply interpreting the mortgage rate as an Effective annual rate, whereas it is actually an annualised Nominal with monthly compounding. The basis is different and unless you take this into account your sums will differ from the bank as you have found.

When banks quote rates they don't use effective rates (except for the APR which is mostly useless for the reasons KingStreet has already given) so you shouldn't try to apply their nominal rate as an effective rate.

It's like you filling your diesel car with petrol and then getting upset because your car then won't start - petrol may be a fuel, but it ain't the same as diesel

olsen

Thanks for the answer.
The annoying thing is that no one in Santander have been able to help: it doesn't seem to be stated anywhere in the paperwork which rate calculation is used. It may be common knowledge, except no one in the call centre seemed to have a clue about my issues, and no one could tell me how much I would owe after 5 fixed years, when I took out the mortgage,-so unless perhaps I had made the for all other purposes useless APR calculation for the full 14 year term, I wouldn't have been able to guess at the time I took out the mortgage.

getmore4less

Standard practice mortgages are flat rates not annualised

Common implementation is daily interest compounded monthly.

olsen

getmore4less -thanks. Santander call centre has also told me a few times that interst is daily compounded monthly, -but it just doesn't tie up, (it doesn't take 5 minutes to make an excel spread sheet, and drag the formulas down 12, 365 or 5000 rows for that matter) However a letter I received from Santander recently states that the yearly interest is just divided by 12, and this is the only formula which ties up with my figures -so I am really annoyed that the bank can't give me the right answer, and didn't when I took out the mortgage, so it sort of seems up in the air if they take a 1000 pounds more or less. What I really need is a clear answer from the bank, which shouldn't be difficult, and if possible a letter stating this method is common practice.