Initial interest question

youandiaredominoes

I'm due to complete soon but my mortgage adviser has told me that initial interest means that the lender applies an interest rate on our mortgage balance from the day we complete to the day we make our first mortgage payment. He said worst case scenario is that the interest will be double and our first mortgage repayment could be double due to interest. This came as a bit of a shock to me.

Any advice on what to do? Is this normal?

Senior_Paper_Monitor

The 'normal / common' formula (it varies slightly by lender) is that you will pay the interest only component for the remaining part of the month in which you complete + a normal repayment monthly amount during the second month.


Your broker will be able to calculate the amount/date for you once he knows the completion date - as he has the mortgage details and your standard DD date available.


The lender will give you at least 10 days advance warning of the payment amount/date.

pinkteapot

Perfectly normal, as there's normally a gap before your first payment.

For example, if you complete today and you asked for repayments to go out on the 1st, with all the lenders I've been with your first repayment wouldn't be on 1st November. It would be 1st December. As a result, that repayment will be higher than normal as the interest would be for 14th Oct to 1st December, instead of 1st November to 1st December - 6 weeks instead of a month. But, on the other hand, you don't repay anything on 1st November (and you're not paying your old rent/mortgage either).

Your lender can confirm the exact date of your first repayment, and the amount. Phone them, or phone your broker and ask them to find out for you.

ACG

Its actually usually the day the lender releases the money to your solicitor (which can be a day or 2 before completion).

So assuming you complete today and your first payment is the first of November - your first payment would be 1 full month plus 16-17 days worth of interest (bare in mind it is only the interest and not the repayment so it would not be like 1 and half months payment in 1, it would be a little less than that).

TrickyDicky101

ACG wrote: »

So assuming you complete today and your first payment is the first of November - your first payment would be 1 full month plus 16-17 days worth of interest (bare in mind it is only the interest and not the repayment so it would not be like 1 and half months payment in 1, it would be a little less than that).

This will depend on whether your lender requires repayments on an arrears or advance basis:

i) if arrears then assuming your first payment is within one calendar month of the loan advance, your monthly charge should be consistent with the quoted monthly charge in your mortgage offer.

ii) if advance, then you will be charged interest from the day the loan was advanced to the day of the first payment plus your normal monthly payment.

I believe building societies (and ex-building socs) tended to take repayments on an advance basis, whereas traditional banks tend to do it on an arrears basis.

ACG

I was under the impression all would want it in advance - every day is a school day.

TrickyDicky101

It's important to note that payment in arrears or advance doesn't change when interest is charged - it is still from the point in time when the lender advances the cash (ie from Completion, or as you say, a few days before Completion). It only concerns on what basis the payments have been determined:

in a 'pure' payments in advance basis (ie first payment due on the same day as the lender makes the advance), the borrower has really only borrowed the loan amount less one repayment amount, and it is this balance on which interest is charged.

Sequence (Advance basis)
1st Oct loan advanced £100,000
First repayment 1st Oct also -£500
Amount on which interest charged from Day 1: 100,000 - 500 = 99,500

In an arrears basis, interest is initially charged on the full loan amount:

Sequence (Arrears basis)
1st Oct loan advanced £100,000
Amount on which interest charged from Day 1: £100k
First repayment 1st Nov -£500

In either case, the interest rate is the same, it is simply the starting loan amount that differs.

When first payment (advance basis) is delayed (e.g. due to direct debit t&cs) then interest is charged on the full initial up until whenever the first payment date is and the payment then made consists of this interest plus that full first payment.

Personal loans are almost always on an arrears basis I believe.