Mortgage Overcharge

DaveUK_3

I am not too sure that this is the right Forum to post this on but here goes!

In 1986 I took out a mortgage with the Chelsea Building Society.
The Mortgage was an 'Interest only' mortgage the Advance was for £21900.
The Interest rate at the time was 12% plus an additional 1.5% for the first 12 months making a total interest rate of 13.5%

Now, I did not know, but the Chelsea did not reduce my rate of Interest after 12 months so I have been paying 1.5% interect for the past 19 years!

Chelsea have now admitted their mistake and I have received the following letter:
'Following a review of your account it would appear the incorrect interest rate has been applied to your mortgage account.
For your information at the time you took out your mortgage with the Society in 1986 our system was not sophisticated enough to remove these loadings automatically. Therefore an administration error has occurred as this loading was not removed manually when it should have been reviewed.
I have today removed and back dated this additional interest rate to 8 March 1986 and credited your account accordingly. For your information this has resulted in the Society reducing your mortgage balance by £6,588.64.
Finally I am happy to inform you the Society has agreed as a gesture of goodwill to give you a payment inthe sum of £150 in view of the level of service you have received'.

My question is this...surely they should have applied a compand rate to the overpayment? and if so how do I work out how much that would be?
And should I accept their £150?

Any help would be appreciated..
Thanks

lisyloo

My question is this...surely they should have applied a compand rate to the overpayment?

I think you need to find out how the amount has been calculated bcause at the moment you don't know whether this has been done or not.
You need to ask them for details of the calculation.

and if so how do I work out how much that would be?

It would be possible for someone to work that out but they'd need more details.
e.g. whether it's annual or daily interest, the interest rate history and the balance history.

And should I accept their £150?

I wouldn't accept it yet until you know whether what they've given you is correct.

You are going to need some help with this.
Do you have and friends/family/colleagues who can help you, anyone in the finance department at work?
This is not trivial to calculate.
Failing that you might need to get professional advice which of course would need to be paid for.
Sorry - but it's not strightforward - the person calculating this will need to know about every transaction over the 19 years to calculate it correctly.

david78

I think lysloo has missed a trick here.

If its interest only, the balance on your account will have been approximately constant. Isn't the amount of overpaid interest just this value:

19 * £21900 * 1.5% / 100 = £6241.50

Your lender has converted this to capital.

This figure is approximate though because at times your mortgage balance will have been slightly more or slightly less than the £21900.

On this basis their figure seems reasonable. Try to get their calculation details, but I would accept it and pocket the £150.

David.

PS. Because its an interest only mortgage, it makes no difference if interest is calculated annually or daily.

zzzLazyDaisy

Surely the point is that money should have been in OP's bank account earning interest all those years. So if they simply roll up the over paid inteest and deduct it from the capital, they have, in effect, had an interst free loan all those years.

I would have thought that the correct way to calculate it would be to recalculate the mortgage as if the overpayments had been intentional. That is impossible wthout more info, because you would need to know whether interest is calculated daily, monthly, whatever.

But, to take a simple scenario. If interest is calculated annually - at the end of year one the balance was correct. At the end of year two, there was an overpayent, so the capital balance should have reduced, and therefore less interest was payable, SO the overpayment is now greater than in year one. At the end of year two, the (increased) overpayment has reduced the capital balance again but the mortgage payments remain the same so at the end of year three, the over payment and consequent capital reduction are again increased....

Ditto for each year following...

ReportInvestor

The extra 1.5% surely needs to be calculated for 18 years, not 19.

This gives £5,913 - without compound interest.

I did a very rough calculation of what you could have earned over the years investing the annual amounts gross at around 1% below base rates and it came to over £9,500.

So go back to Chelsea and ask them to recalculate, giving you a detailed breakdown.

MarkyMarkD

I agree with Reporter - I think they've failed to take account of the benefit you would have derived from having the money, and have just worked it out on the amount of interest they themselves have over-charged which isn't the right answer for you!

£150 is also a derisory amount of compensation for what is a fairly significant and long-running !!!!-up, but of course if you'd had the money you'd probably have paid tax on the interest so getting compensation calculated on a gross basis means you are probably benefitting. So I'm not sure I'd push that argument too far.

Still, ask them for a proper calculation and point out that you would have had the money invested wherever during that time earning good rates.

david78

I see, there's also the interest which could have been earned on the overpayment. But it is not clear whether its 18y or 19y from the OPs post.

DaveUK_3

Thanks very much...the info you have given has been very helpful !!
I will try to get some more info and get back to you if that is OK

Once again many thanks..

MarkyMarkD

David,

It is clear that it's 18 years because there have been 19 years since 1986 and the first year was intended to correctly incur the 1.5% supplementary interest.

lisyloo

I think lysloo has missed a trick here.

If its interest only, the balance on your account will have been approximately constant.

Others may ahve answered this, but if you are overpaying (which is effectively what's happened) then the balance would not stay constant.

If the extra payments have not been used as overpayment i.e. just pocketed, then over 18 years, I would certainly want reasonable interest paid too.

MarkyMarkD

That's a good point, lisy. I should demand restatement of the balance as it would be if the payments had been treated as overpayments, rather than the amount of interest YOU would have earned on those overpayments if you had kept them.

Then the calculation rate won't be 1% below BBR (or whatever) but significantly over BBR i.e. the rate on the mortgage.