Residual Interest Query

clozzy · 17 June 2018 at 9:07AM

I am looking for advice. I have a mortgage for £142,980 at 2.79% fixed for 10 years with a major building society. The monthly payments on this are £1,169.70. Interest is calculated daily.

The issue is what they call residual interest; that is the amount of interest charged from when the funds were sent (May 9th 2018) to the end of May - a total of 23 days. The residual interest is added to your first monthly payment (June 1st) meaning that your 1st payment is usually higher that the rest of your payments (which for me would be fixed at £1,169.70 for the next 119 payments). So far, so good.

However, I've calculated 23 days interest on the advance as £251.37. The building society have calculated it at £263.20. I queried this and was told how they calculate this residual interest:

Calculation for interest in days to the end of the year:
£142980.00 x 2.79% ÷ 365 x 237 = ££2,590.21 (A)
Calculation for interest in full months to the year end:
£142,980.00 x 2.79% ÷12 x 7 = £332.43 = £2327.01 (B)
Residual Interest A – B = £263.20

I've disputed this calculation because it is mixing 'daily' and 'monthly' factors. I got a response as follows:

Your comments on how you feel the residual interest should be calculated are noted.!With reference to part B of the calculation an average of 30.4 days is assumed.! It is our policy that we use our!formula! to work out how the residual interest!is calculated and the figure of £263.20 still stands.

So - as far as I can see - that calculation is totally wrong - and I suspect that many other customers are being charged in this way. Right now I don't know if they 'reconcile' this all at the end of the year or not - but either way, they've taken more money than they should have.

Does anyone have any observations, comments or advice on this ? It is my intention to raise a formal complaint (and get it adjudicated if necessary) but I wondered if there was any sensible basis for their calculations and/or whether I should progress this to ensure that customers are correctly charged ?

glentoran99 · 17 June 2018 at 9:16AM

I like a puzzle, Ill see what I can work out and come back

glentoran99 · 17 June 2018 at 9:25AM

I get a slightly different total £251.58

I get this but dividing the APR by 365 and compounding the interest daily onto the principal

clozzy · 17 June 2018 at 9:32AM

Not entirely sure I understand what you mean by compounding interest.... because the terms of the offer are clear; I have to pay 23 days interest on the amount advanced. If you use their formula A replacing the number of days with 23, then you should get 251.37 (and the odd pence I'm not complaining about - it's the METHOD they are using that I believe is wrong).

glentoran99 · 17 June 2018 at 10:53AM

clozzy wrote: »

Not entirely sure I understand what you mean by compounding interest.... because the terms of the offer are clear; I have to pay 23 days interest on the amount advanced. If you use their formula A replacing the number of days with 23, then you should get 251.37 (and the odd pence I'm not complaining about - it's the METHOD they are using that I believe is wrong).

I would agree with you that the method is wrong.

Compounding interest

Interested is charged daily

So day 1 interest is on the principal

Day 2 interest is on the total of principal and day 1 interest

Day 3 interest is on the total of day 1 and day 2 + principal

etc etc

meaning the amount of interest added slightly increases each day

TrickyDicky101 · 17 June 2018 at 11:51AM

2.9% isn't an APR. It's the nominal annualised rate. Interest isn't compounded daily - it is monthly.

OP I agree with your calculation. I also think you have an answer from the bank from staff who don't really understand (or have authority) to change such things.

That being said, I rather suspect that whilst this is their calculation of the additional payment from you, it doesn't actually affect what you will be charged (which will be worked out by the bank's systems - which hopefully are set up correctly). In essence therefore you will have made an overpayment of £263.20 less £251.37 = £11.83.

Tom99 · 17 June 2018 at 2:19PM

I agree that if you have to pay this extra you have been overcharged but is £11.83 really worth getting worked up about.

Thrugelmir · 17 June 2018 at 5:27PM

While the calculation may be wrong in principle. One suspects that it's being performed that way for speed. There'll be a team handling the manual calculation of completion "first payments". Having a standard methodolgy reduces errors and makes for ease of checking.

However although you've paid that amount. You won't be charged that amount. As the internal systems will calculate the correct charge to be applied to the loan account.

Everything will wash out over the duration of the mortgage term. As is the case of for your mortgage repayments in general. As no one will sit and calculate the number of leap years that occur during your mortage term for example.

clozzy · 18 June 2018 at 7:46AM

I'm not really fussed about the over-charge. I'm fussed about the method by which it is calculated - because it won't only be me who's had this over-charge and to be fair most people wouldn't even check. The days when one could assume that financial institutions would do and do do the right thing are done & dusted.

clozzy · 18 June 2018 at 7:53AM

With respect to the comment about bank systems being set up correctly, that is only an assumption (and to be fair, a reasonable one). I do have online access to the mortgage account - but it simply isn't very clear (it tells you what you owe, the amount of interest changed and what you've paid). The account breakdown document that they provided me with DOES show the correct charge (of 251.37). I suspect when the 1st payment if 'processed' the adjusted balance (i.e the amount of the advance less capital repayments) will take the over-payment into account which ought to mean that the FOLLOWING month I will be paying interest on 11.83 less (if you see what I mean). But that still does not alter the fact that the initial calculation is wrong.

getmore4less · 18 June 2018 at 8:27AM

all daily interets mortgage the calculation of the payment is an approximation using standard amortization which used standard months and fixed payment dates.

The reality is the payment come in at different times and the months are different lengths so there are adjustment made every now and then usually at the annual review or a rate/payment change.

What you really need to find out is what interest is really being charged.

All mortgage companies should do "payments to reduce the balance" and "interest accrued increasing the balance" as separate transaction on the account, this would give transparency to the amounts.

depending on what details you can get through statements/on-line it should be possible to work out if the interest is being calculated properly on the daily balances.

Typically daily interest mortgages should be monthly compounding, interest accrues daily and gets added once a month.

I think some lenders may add it daily.

The issue is what they call residual interest; that is the amount of interest charged from when the funds were sent (May 9th 2018) to the end of May - a total of 23 days. The residual interest is added to your first monthly payment (June 1st) meaning that your 1st payment is usually higher that the rest of your payments (which for me would be fixed at £1,169.70 for the next 119 payments). So far, so good.

The account breakdown document that they provided me with DOES show the correct charge (of 251.37).

They used a calculation that guesses the interest and gets added to the payment this is a simple way to do it to get the first payment closer to the amount needed to keep the mortgage on track

As long as the real amount of interest added was right there is not a lot(nothing) to worry about.
The key is are the interest calcs correct and the payments credited on time.

As I said above every payment going forward will be a little bit wrong as the normal mortgage payment is just a guess(a quite good one),

it is just the way amortization works when you use the simple model which all lenders do as accounting for weekeds,BH and month length makes the calculations a lot more complex and even then they only stay right if all the payments are on time and there are no other changes like a rate change.

Far easier to use the simple calc and get close enough.

Residual Interest Query

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