Mortgage Calculation Problems

Krash420

Hi,

I'm having a difficult time understanding how the mortgage interest on my parents buy-to-let properties has been calculated, and I was wondering if anyone could shine a light to where I'm going wrong in understanding this.

The interest-only mortgage was taken out in 2006 from Birmingham Midshires for a total amount of £128,981. The rate for the first two years was at that point fixed at 4.99%. Which makes the monthly repayments £536.34 (which is what they paid), however having a look at the mortgage statement, I can see the interest charged in the first year was £6,452.80 and not the £6,436.20 that I calculate it to be.

In effect they're over paying, not by much (£16.60 in the first year) but as time goes on the "overcharges" obviously increase. Am I calculating the interest incorrectly, or have they actually just charged a slightly higher rate of interest than the one stated in the statements?

David_White

Did they add any fees to the mortgage when it was taken out?

If you can find a copy of the original Key Facts Illustration it'll show you.

I'd guess fees of around £330 were added.

Thrugelmir

Did Birmingham Midshires calculate the interest annually or on a monthly basis?

Were the repayments made in arrears or advance?

The difference of £16 could well be accounted for by timing differences.

Krash420

I've included the fees in the amount quoted at the top (fees totalled £1941).

Payments are made in arrears (i.e. Mortgage started on 6th November, first payment made on 6th December which should be cost of the interest payment for the month. Second payment on 6th Jan and so on. Statement was dated 6th November 2007, i.e. exactly a year from when the mortgage was taken, which showed that the interest added to the account is £6,452.80.

Unfortunately my dad hasn't kept the files very organised, and I can't find a number of the statements which I'm now going to get him to try and find, as it should make things clearer, hence I can't see how the interest is calculated.

However, if it's calculated annually, then, we should have been charged £6,436.15 based on a 4.99% interest rate and starting balance of £128,981. On Monthly it should be £6,436.20 (assuming a monthly rate of 4.99%, which obviously gives a slightly higher annual rate, hence the extra 4p of interest).

Given that there are no other fees, it does seem that the interest is miscalculated - or maybe the interest is for a period greater than a year, though the statement suggests otherwise, and unfortunately I can't find the very second statement he received for the second year.

From the sounds of it, it does seem like they've just charged my dad more interest than they should have.

I think I'm going to get him to phone them up and ask them to send the mortgage statements from the beginning, though given it's 10 years ago, I'm unsure they will have them all, though they should hopefully be able to see the payment and interest history.

Thanks for your help.

David_White

Keep us posted, I'm intrigued to know the answer

TrickyDicky101

The actual interest charged over a period (ie a month) will be based on the number of days within the charging period (which will change month to month as some days have 31 days, others 30 - and February 28 or 29).
Additionally, if the payment date falls on a weekend, payment won't be taken and will usually be taken on the following working day - whereas interest will continue to accrue.
Both of the above give rise to the possibility that interest ends up being charged on interest (ie compounding).
This possibility would make sense if the payment paid by your parents was the same each month irrespective of the actual number of days in each charging period.
Has the capital balance remained constant or has it increased slightly?

Krash420

I've done the calculations on a daily basis as well, and in that scenario the interest is still much closer to the £6,436.20 I estimated above than the £6,452.80 that my parents were charged.

The capital balance has increased as the payments were taken as if the interest rate was 4.99%, but the actual interest charged seems to be based on a slightly higher percentage. I should note that the later statements that I've found have the interest calculated correctly, it's just the pre-2010 statements that have it wrong - but it all compounds of course.

I'll let you guys know once my dads hopefully found the rest of the statements and once I shoot off a letter to them asking about it.

amnblog

The mortgage may have been £128,981 originally, but there may be reasons why the figure is a little higher now 10 years on. What is the current balance?

Thrugelmir

Krash420 wrote: »

I've done the calculations on a daily basis as well, and in that scenario the interest is still much closer to the £6,436.20 I estimated above than the £6,452.80 that my parents were charged.

Interest will be calculated daily and charged monthly ( to the last day).

dimbo61

Not a leap year !
Extra days interesting !

getmore4less

IT should say in the T&C how the interest is calculated and added to the debt.

Unless you know the accrual rate and compounding(when the accrual is added to the account) you will just have to try each combination.

you also have to know how they convert the flat rate into the rate for the accrual period.