simple or compound interest?

engineertony

My mortgage rate is quoted as 5.49% fixed since 2004.
My original mortgage goes back to 1986 when rates were higher, and I started at 11% reduced by some tax scheme called MIRAS to 7.8%.
Lately I've notice that this annual rate is used to find a monthly rate and they add this monthly to my balance.

After I asked they have confirmed in a letter that the monthly rate being used is 5.49/12 i.e. 0.4575% per month.

So now I've been back to them to ask why they use the simple interest rate and then apply it at a compound rate on my balance. If I work out 5.49/12 compound I get 5.64%.

Over the 27 years of mortgage and remortgage even at this low rate I find a 15% difference, which on a loan averaging £40,000 is around £6000.

Is this normal practice? My credit cards use a true monthly rate from the quoted annual rate, it seems a bit steep to take a simple interest rate and then compound it to squeeze a bit more out of me.

holly_hobby

MIRAS = Mortgage Interest Relief At Source (withdrawn 6 April 2000).

How long is your fixed rate, 10 yrs or more ?

Have you extended your mge term - given you're 27 yrs into it ? or was your original term in excess of a traditional 25 yr term (eg as seen with pension mortgaes) ?

Are you applying todays rate to the whole of the preceeding 27 yrs in your calcs ?

The lenders rest period will affect the figs - if annual rest (few and far between now) you could find that there is a slight compounding of interest, but this would be on any variable payrate, ie. SVR/Discount/Tracker/Capped products, that is only adjusted once per mge yr - as such I wouldn't expect to see compound interest on a fixed product.


Holly

Simon_gloster

Delightfully put H x. Annual instalments seem to be in force here.


If you have not done any transactions is product transfer or further advance then it's likely your in annual interest as opposed to daily interest.

Google it to the lender your with and it might give you answer you need.

TrickyDicky101

Most credit cards I think quote their interest as an APR whereas mortgages are usually quoted on an annualised nominal rate compounded monthly (lenders are also obliged to give APRs for comparison which are amazingly unuseful since they also take account of fees)

engineertony

I lend you £100 at 12%.
At the end of the year you owe me £112.
If I charge you 1/12 of 12% per month, i.e. I take the simple interest rate and then apply it compound, then you will find you have paid around 12.68%.

£100 + 12%x£100= £112
but £100x (1.01)12= £112.68

If I take a mortgage at 5.49% then I expect to pay 5.49% not 5.64% which is what they are charging me.

StuC75

As & when you remortgaged do you have the paperwork that you signed which would advise what you signed to? Different rules and regulations as to how such products were calculated.

Afterall just because you may quote and calculate it one was doesnt mean thats

A- What you signed up to

B- How the Company actually works it out - Would assume that there processes have been audited and reviewed on a regular basis.

TrickyDicky101

engineertony wrote: »

If I take a mortgage at 5.49% then I expect to pay 5.49% not 5.64% which is what they are charging me.

I hope this doesn't sound too unsympathetic but before you sign on the dotted line next time maybe you should actually understand what it is you are signing up for?

Presumably you were happy with the repayment amount each month, so what does it matter on what basis that interest is quoted?

It is your misunderstanding, not a result of the bank trying to hoodwink you.

engineertony

Hi Tricky,
Progress...they've admitted an error and at the level I've been dealing with they've advised a "formal letter of complaint". That's gone off today and according to the financial ombudsman they have 7 days to acknowledge and 8 weeks to sort it.
The ombudsman also steered me to the Financial Conduct Authority who were very helpful. They have a handbook of rules for lenders and one clear point is that they must inform me of the true APR with no hidden extras.
My interest rate is clearly 5.49% so whether I notice it or not they are obliged to not only tell me the true rate but to give me an illustration. It's all on the FCA website and in booklets from the Citizens Advice Bureau.

engineertony

26Jun2013....It's all gone to the Financial Ombudsman, I can appreciate the points made above but when I discussed it they seemed sympathetic so I consider it worth a shot.
It will hinge on whether a mortgage lender is obliged to illustrate how the monthly rates are calculated instead of quoting an annual rate and a meaningless APR. There is another rate which is hidden, that is the rate you actually pay if they compound 1/12 of the annual rate.
Although banks and credit card companies do use a rate which compounds to the quoted annual rate it seems that loans from building societies don't. By using 1/12 of the quoted annual rate they squeeze another fraction of one per cent out of the borrower.

engineertony

Reply from a single officer at the Financial Ombudsman Service, with a direct line & personal e-mail. Next is contact with experts in this particular field.

I've sent more information as I've researched the other credit cards I have. Always the same, the interest rate charged each month compounds to the yearly rate, example 2.2% per month gives 29.84% per year. If the 29.84% was divided by 12 and applied each month then the interest rate would be 2.49%.

The only way I can lose is if the mortgage companies have their own regulations under the consumer credit act 1974 or whatever regulations apply. The Financial Conduct Authority Regulations don't specify a way of applying the quoted interest rate and they are full of legal jargon and the usual smoke and mirrors to confuse the general public but there must be other rules applying.
Time will tell, I will report.

holly_hobby

Just a quick reference note, mortgages are not regulated under the CCA74 (updated).

What did the reply from FOS actually say ?

I am assuming it didn't suit objectives (and you have had it confirmed that the mge rest period isn't the reason for the 0.15% differential), as you are referring the matter to experts ... whom of the experts you are engaging to assist ?

If you want to explore more and reason if your argument has legs, refer section 3 (discussing APR and lenders responsibilities or not) of the attached MCOB guide - http://www.fsa.gov.uk/pubs/hb-releases/rel61/rel61mcob.pdf

If the lender and FOS have rejected your complaint, your next route would be thorough the civil courts ... definate large bill (unless you can get a no win no fee arrangement) with an largely undefinate result.

Hope this helps

Holly