"Initial interest" on a mortgage

In message , John Redman writes

Different lenders handle this different ways. In your case it looks as though the lender is calculating the interest form the day they sent the money to your solicitor and if they did this in advance of the 22/12 and possibly sent a draft rather than sending it by TT this could account for 12 days of interest.

It also looks like you lender does not calculate the interest to take into account the monthly payment of interest but only on the 'annual rest' basis. To some, this looks like a rip off, but it isn't necessarily a rip off because many lenders who DO use daily or monthly interest accrual methods generality charge a slightly higher interest rate. This is one reason why comparing by APR is important or, for myself, performing a 'total cost' calculation.

"John Redman" wrote in message news:cr66ur$2j4$ snipped-for-privacy@newsg4.svr.pol.co.uk...

I think most mortgages work this way. Interest is charged on a calender monthly basis and becomes due on the 1st of the month, but they don't usually care when in the month you pay it (ie you can wait till the end of the month if you want). If you complete part way through a month then the interest due for the next month includes a part month's interest for the month you completed in. That's how the mortgages I've had have worked anyway - best check with your lender.

I'd guess that interest is paid in advance, ie on the 1st Jan, owe £1,200.72 in interest to cover Jan 1 - 31... is this normal?

If its interest only, then surely you are just paying interest, and hence next month you owe interest on the same amount?

Just wondering.. for when I get round to buying a place!

Regards

"john boyle" wrote

Interesting point which I hadn't thought of.

Of course, when the mortgage is redeemed, all payments made at that point are considered, so one does get this overpayment back....eventually.

In message , John Redman writes

Hmm, I am not sure what you mean. These 'overpayments' are nicked by the lender under the excuse 'interest'.

No, this is not paying in advance. You should expect either to pay the initial interest (i.e. interest for the first part-month) on 1st Jan, being the first 12 days' interest in arrears, and then on 1st Feb you should pay the first whole month's interest (being for January).

In your case, from the sound of it, your December and January payments have been lumped together and should be charged on 1st Feb, with nothing at all being payable on 1st Jan.

Plus interest for the last 12 days of December.

How do you work that out? You've borrowed £288,750 on 20th Dec, so from that instant you owe that sum. One day later, you owe that sum plus one day's interest thereon. Your debt increases by about £39.50 per day, but under the terms of the agreement they don't charge you interest on this additional debt unless and until you get into serious arrears.

"Mark Blewett" wrote

Spot on - the opening statement times the advance from 20 December, not the completion date of the 22nd.

That was my question, in effect. If I pay them 1200-odd on Jan 1, I don't owe them the original amount, I owe them an average of ~600 less than that over the course of the month. So either my repayments should be marginally lower, reflecting that, or I shouldn't have to pay them 1200 until Feb 1st. On Jan ist (well, 4th in fact) I ought to pay just the 472 reflecting less than a month's use of their money.

An alternative explanation offered here was that if they calculated the interest differently the interesr rate would have been higher.

"john boyle" wrote

I mean that if I redeemed the mortgage the day after I paid 1200, the outstanding balance wouldn't be 288,750 but 287,550, i.e. the settlement figure would reflect the fact that the interest has been paid in advance.

"Ronald Raygun" wrote

Correct, but that's not what happens. On Jan 1, I pay the first 12 days' worth plus another payment of 1200. I do not, as I would have expected, pay for 12 days' use of the money on Jan 1 and then for a month's use of it on Feb 1. I pay for 42 days' use, having had only 12.

Yep. And yet this is not what happens - and it didn't happen in 1988 or

No, that's the 472.41. I've already counted it. If I pay that on Jan 1, I'm all square again. I shouldn't owe them 1200 until Feb 1.

That's right, so by Jan 1, I owe about 472. The payment day is set as the first of the month, so on Jan 1 I should pay 472, then on Feb 1, 1200, and so on.

I wonder if I should challenge the lender on this, just for a laugh. I've seen it before and always thought it a bit of a scam. If one asked, when applying for the loan, for the payment date to be exactly one calendar month after completion, on the logic apparently used here, they'd have to ask for

I'm sure there's an explanation for this but I suspect it will be of the "Tough s*it sonny - you signed" variety. I make it that eitehr I'm overpaying by ~2.50 a month, or that they're getting 2 years' use of 1200 of my money (by collecting it before it's properly due).

Then either they have made a mistake or they are in fact, as you suspect, charging interest in advance which is unusual and doesn't make any sense. That needn't mean they can't do it, so you'll have to read the T&Cs again (which you were given the opportunity to read before you signed, weren't you, and you didn', did you?).

The fine print ought to clarify whether interest is paid in arrears (as it properly should be) or in advance (for which there is no basis in common sense).

Read it.

"Ronald Raygun" wrote

Yes, and no, I'm afraid.

I shall write to them and see.

I'd guess the lender doesn't try and complicate the maths, so I suspect since the initiial interest is upto the end of december, the lender synchronises to the start of the month.

Either the £1200 payment is for january in advance or arrears... you'll need to check the paper work I guess.

I'm interested as I plan to buy sometime, and whether I needed to factor into my pile of cash a mortgage payment in advance.. I'd always assumed it was in arrears!

Regards

In message , John Redman writes

Thats what I thought you may mean. I think if you look at your terms & conditions you may find this isnt the case. (It may be the case, but I think it wont be in yours)

In message , John Redman writes

If your last sentence refers to my post, then you have misunderstood it.

As already said, you appear to be on an annual rest system, which takes no account of the reduction in balance from monthly payments and/or the interest is charged monthly so no reduction in balance occurs. In your case interest is calculated on the balance outstanding on a fixed day once a year, then apportioned to 12ths and in the case of initial interest, in 365ths.

What I also said was that if the interest was calculated on a daily basis, in the manner in which you seem to want it to be calculated, then in many cases the nominal rated charged is higher than for annual rest mortgages, so you are in the same position.

I would hazard a guess to say it is Northern Rock.

Your payment on 20th December (£472.41)is the interest charge from the 20th until the 31st December. Then the other payment(£1200.72) is the interest charged from 1st Jan to 31st Jan. When you pay by Direct Debit you pay your interest in advance, rather than arrears. If you pay manually by cash cheque or card then you can pay at any point up until the 31st Jan, but they will charge you £25 a year for that.

"Phil Deane" wrote

It's C & G, but Halifax and Abbey do the same.