Mortgage Calculations

Duffers11 · 12-09-2019 10:51pm #1

Hi, I’m looking for some advice. Do the banks have to provide you with a calculation of interest charged on a mortgage. I feel the interest has been charged incorrectly on my mortgage. I requested a detailed breakdown which they have refused to provide. My loan agreement states the interest is charged monthly however the interest is being charged twice a month.

L1011 · 12-09-2019 11:02pm

The standard calculation documents given are annual; and if the figures match that you aren't at a disadvantage.

If you legitimately feel you have an issue this is an issue for the Financial Ombudsman - https://www.fspo.ie/

Duffers11 · 13-09-2019 7:19am

My loan agreement states interest is charged monthly however they are debiting interest twice monthly from the account. My main query being I didn’t think they could refuse to provide you with a calculation as to how these charges are met.

Darc19 · 13-09-2019 8:45am

Interest on mortgage loans is calculated on a daily basis and usually "applied" on a monthly basis.

But it could be applied weekly or even daily and it wouldn't make any difference.

Also month by month the interest amount paid drops slightly and the capital amount paid increases slightly until the last payment when the interest will be just a couple of euro.

Duffers11 · 13-09-2019 9:14am

Darc19 wrote: »

Interest on mortgage loans is calculated on a daily basis and usually "applied" on a monthly basis.

But it could be applied weekly or even daily and it wouldn't make any difference.

Also month by month the interest amount paid drops slightly and the capital amount paid increases slightly until the last payment when the interest will be just a couple of euro.

But surely I would have to agree to it being charged twice a month as they are essentially adding interest and then added it again.
Do I have a right to see how they are getting these figures? The fact they are refusing to provide these makes me wonder all the more as this institute is notorious for overcharging customers on their mortgages.

coylemj · 13-09-2019 11:10am

Duffers11 wrote: »

But surely I would have to agree to it being charged twice a month as they are essentially adding interest and then added it again.

That would be happening anyway, it makes no difference. As Darc19 said above, the interest is calculated on a daily basis. Whether they apply it to your visible balance weekly, every 2 or 4 weeks doesn't affect your outstanding balance.

When they 'apply' the interest to your balance, all they're doing is synchronising the balance they maintain in the background (where interest is applied daily) with the one you can see. How often they do this does not affect the amount of interest you pay.

dotsman · 13-09-2019 1:38pm

coylemj wrote: »

That would be happening anyway, it makes no difference. As Darc19 said above, the interest is calculated on a daily basis. Whether they apply it to your visible balance weekly, every 2 or 4 weeks doesn't affect your outstanding balance.

When they 'apply' the interest to your balance, all they're doing is synchronising the balance they maintain in the background (where interest is applied daily) with the one you can see. How often they do this does not affect the amount of interest you pay.

Actually, that's not correct! Applying the interest fortnightly actually would end up costing the customer more than if it was applied monthly. Once the interest is applied, it is effectively "capitalised". Interest is calculated daily on the outstanding balance. Once it is applied to the account (typically monthly), that is when you are paying "interest on the interest". By applying the interest fortnightly, the customer is being charged "interest on the interest" earlier than they normally would. Each case would be very small, but over the life of a mortgage, could add up to quite a few bob.

If the loan agreement states that interest is applied monthly, then it must be applied monthly, and the OP should make a formal complaint.

Duffers11 · 13-09-2019 1:46pm

dotsman wrote: »

Actually, that's not correct! Applying the interest fortnightly actually would end up costing the customer more than if it was applied monthly. Once the interest is applied, it is effectively "capitalised". Interest is calculated daily on the outstanding balance. Once it is applied to the account (typically monthly), that is when you are paying "interest on the interest". By applying the interest fortnightly, the customer is being charged "interest on the interest" earlier than they normally would. Each case would be very small, but over the life of a mortgage, could add up to quite a few bob.

If the loan agreement states that interest is applied monthly, then it must be applied monthly, and the OP should make a formal complaint.

Thank you, that’s what my understanding of it is. Interest on interest. When I asked them for a breakdown they refused to provide it.

Wheety · 13-09-2019 1:50pm

dotsman wrote: »

Actually, that's not correct! Applying the interest fortnightly actually would end up costing the customer more than if it was applied monthly. Once the interest is applied, it is effectively "capitalised". Interest is calculated daily on the outstanding balance. Once it is applied to the account (typically monthly), that is when you are paying "interest on the interest". By applying the interest fortnightly, the customer is being charged "interest on the interest" earlier than they normally would. Each case would be very small, but over the life of a mortgage, could add up to quite a few bob.

If the loan agreement states that interest is applied monthly, then it must be applied monthly, and the OP should make a formal complaint.

I thought interest was only paid on the balance? At first the interest is so high because the balance is at it's highest. But each month more will go off the capital and less to interest. At no point are you paying interest on interest.

Apologies if I'm way off. Can anyone confirm?

TheChizler · 13-09-2019 1:59pm

Interest won't be added to a balance, or compounded, unless you miss a payment right? Depending on the loan agreement.

Wheety · 13-09-2019 2:04pm

TheChizler wrote: »

Interest won't be added to a balance, or compounded, unless you miss a payment right? Depending on the loan agreement.

This is what I thought. The interest is building up daily but is never actually applied to the balance. The payments are applied to the balance as:
total payment - interest

The interest is not added to the balance. You just pay it and the left over goes off the balance.

This is the calculator I normally use as you can see the amortisation schedule.

https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx

Duffers11 · 13-09-2019 2:06pm

I’m clueless at how it works hence looking for advice on how to proceed ðŸ˜¬ but from what I’m looking at on my loan is the interest being applied so therefore it’s applied to the balance. Then interest is being charged again so it’s incorporating the previous interest balance. My loan is capital and interest and understand that at the start, you are paying more interest but not twice a month. What actually made me look at the situation is that I changed the rate and they charged me one month at the new rate and then increased it the next month, not much in the difference but they said there was a slight discrepancy in the manual v automated calculation even though I have a letter confirming the monthly payment would be what they took the first month after changing rate. Then when I looked at the overall statement, I could see 2 debit interest charges per month. I can’t understand why they are refusing to provide a breakdown on it considering I am paying it. And I’ve never missed a payment in my life!

TheShow · 13-09-2019 2:08pm

L1011 wrote: »

The standard calculation documents given are annual; and if the figures match that you aren't at a disadvantage.

If you legitimately feel you have an issue this is an issue for the Financial Ombudsman - https://www.fspo.ie/

You can just go to the ombudsman, you have to exhaust the internal bank procedures first. If at that stage your issues is not resolved, you can then go to the ombudsman.

The best thing to do is to raise it as a formal complaint. It will get investigated properly and explained to you in full. Hopefully that will resolve your issue. If indeed they are charging your interest incorrectly they will arrange a refund and correct the issue.

They can't ignore a formal complaint as they are legally bound to deal with them, and within specified timeframes, under the Consumer Protection Code.

Duffers11 · 13-09-2019 2:10pm

TheShow wrote: »

You can just go to the ombudsman, you have to exhaust the internal bank procedures first. If at that stage your issues is not resolved, you can then go to the ombudsman.

The best thing to do is to raise it as a formal complaint. It will get investigated properly and explained to you in full. Hopefully that will resolve your issue. If indeed they are charging your interest incorrectly they will arrange a refund and correct the issue.

They can't ignore a formal complaint as they are legally bound to deal with them, and within specified timeframes, under the Consumer Protection Code.

I did raise a formal complaint and that is what they responded with. That they cannot facilitate my request to provide a breakdown and their say is final on the matter. It beggars belief really! So I think I have no option but to pursue to the ombudsman!

TheShow · 13-09-2019 2:10pm

Wheety wrote: »

I thought interest was only paid on the balance? At first the interest is so high because the balance is at it's highest. But each month more will go off the capital and less to interest. At no point are you paying interest on interest.

Apologies if I'm way off. Can anyone confirm?

interest is indeed compounded. you do pay interest on the balance that includes capital & interest.

TheShow · 13-09-2019 2:11pm

Duffers11 wrote: »

I did raise a formal complaint and that is what they responded with. That they cannot facilitate my request to provide a breakdown and their say is final on the matter. It beggars belief really! So I think I have no option but to pursue to the ombudsman!

Ombudsman it is so.

Wheety · 13-09-2019 2:17pm

TheShow wrote: »

interest is indeed compounded. you do pay interest on the balance that includes capital & interest.

Apart from the OP's situation as it sounds like it could be a mistake, how do you figure this?

If you have a mortgage of €200k at 3% over 30 years, the first couple of payments is as follows:

Payment    Principal    Interest    Balance
843.21     343.21       500.00      199,656.79
843.21     344.07       499.14      199,312.73

The interest comes off your payment and the rest comes off the balance. At no point is the interest added to your balance.

Edit: Maybe, I'm wrong here in when the 'interest on interest' is applied. The interest is added daily. Are you saying that day 10 of the month, interest is charged on the balance and the accrued interest of the previous 9 days?

Edit2: I don't think that's true actually. That calculator, exactly matches what I pay for my mortgage when I put in the correct details. And €500 is the correct amount of interest if it's calculated as (€200k x 0.03)/12.

Duffers11 · 13-09-2019 2:25pm

Taking last month as an example as I don't have full statement in front of me but there are 3 transactions on my account. Interest debit accrued on the 16th, then again on the 22nd and monthly payment on the 30th.

Wheety · 13-09-2019 2:32pm

Duffers11 wrote: »

Taking last month as an example as I don't have full statement in front of me but there are 3 transactions on my account. Interest debit accrued on the 16th, then again on the 22nd and monthly payment on the 30th.

I'm not sure what they're doing there.

My statement has transactions on only 1 day a month.

Payment received
Interest added (and deducted at the same time from the payment)
Balance of payment applied to capital

Then I see the new capital total.

Definitely follow through with this. I'm sure if you go on the ombudsman website you'll see the procedure but I think you need the bank to say it's their final decision on your complaint. Then you can raise it with the ombudsman.

TheShow · 13-09-2019 2:37pm

its unusual to compound the interest twice in a month.

Interest is normally calculated on a daily balance and compounded either monthly or quarterly.

its either a mistake or its just the way they do it.

Check the Terms & conditions, it should state the compounding frequency in there.

Wheety · 13-09-2019 2:39pm

Are the amounts different? Is one of the dates the previous date of payment, before the rate change?

I'm just wondering if they're somehow charging you both rates.

Duffers11 · 13-09-2019 2:45pm

I wish looking at my account was that simple!
Well I have in writing from the bank that they will not facilitate my request of a breakdown explanation. I advised them that the complaint was open from my end and they concluded it and closed it with no merit. I'm definitely going to escalate to ombudsman. Thanks for the advice!

Duffers11 · 13-09-2019 2:47pm

Yes the amounts are different. The account has been like this since day one so changing the rate over the last few months hasn't changed that there are 3 transactions a month on the a/c.

Duffers11 · 13-09-2019 2:51pm

TheShow wrote: »

its unusual to compound the interest twice in a month.

Interest is normally calculated on a daily balance and compounded either monthly or quarterly.

its either a mistake or its just the way they do it.

Check the Terms & conditions, it should state the compounding frequency in there.

Loan agreement states monthly.

Wheety · 13-09-2019 3:02pm

It definitely sounds wrong. Be interesting to hear the outcome of this.

Duffers11 · 13-09-2019 3:04pm

Wheety wrote: »

It definitely sounds wrong. Be interesting to hear the outcome of this.

Will keep you posted. After all the stress, hopefully I get a big fat refund! :pac:

coylemj · 13-09-2019 3:27pm

I'm going to try this one more time. If you don't understand, go ahead and complain to your bank and/or the ombudsman but you'll get nowhere. And you can dream on about a refund.

coylemj wrote: »

When they 'apply' the interest to your balance, all they're doing is synchronising the balance they maintain in the background (where interest is applied daily) with the one you can see. How often they do this does not affect the amount of interest you pay.

Duffers11 · 13-09-2019 3:47pm

coylemj wrote: »

I'm going to try this one more time. If you don't understand, go ahead and complain to your bank and/or the ombudsman but you'll get nowhere. And you can dream on about a refund.

You must work for the bank do you!

cruizer101 · 13-09-2019 3:52pm

Can you not just check against an online calculator to see do the figures match, don't worry about the applied interest just look at you balance after any payment.
I'd be doubtful that there is anything wrong here.

Do you overpay at all? if so that could cause issues with online calculators, even ones that allow for it as will depend on exactly when bank apply overpayment.

coylemj · 13-09-2019 3:58pm

Duffers11 wrote: »

You must work for the bank do you!

I'm good at numbers and have studied mortage calculations for several years. Trying to make sense of it is not easy.

Before banks were required by law to show the true rate of interest (APR), converting the advertised rate to the true rate required a bit of reverse engineering which I eventually managed to do. AIB and BoI used to quote retail rates based on different calculations. Back in the 1980s and 90s, one of them took their quarterly rate, multiplied it by four and quoted that in their ads. The other bank took their monthly rate, multiplied it by 12 and that's what they quoted. Both of the numbers were false because they ignored compounding.

It meant that even if they both charged the same APR, the one that multiplied their monthly rate by 12 appeared to be lower than the other, even if they they were charging identical rates of interest.

Darc19 · 13-09-2019 3:59pm

Interest on mortgages is always calculated daily and "amoritised".

If they printed out each day's interest it would take up pages of print, therefore it is applied monthly or in the ops case every couple of weeks.

It would be nigh on impossible to have a different charging system for one mortgage.

They probably don't understand your request and in any case it's probably written in your mortgage agreement.

Google "amortization calculator" and enter figures to probably get the identical figures that the bank has.

Maybe ask the bank the question in a different way?

Sniipe · 13-09-2019 4:10pm

Wheety wrote: »

https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx

I like this - I see you can even add a date where you added an extra payment. However it doesn't cater for interest rate changes. I must try and create an excel sheet which can factor interest rate changes.
It even gives a formula: M= P[r(1+r)^n/((1+r)^n)-1)]

TheChizler · 13-09-2019 4:23pm

Sniipe wrote: »

I like this - I see you can even add a date where you added an extra payment. However it doesn't cater for interest rate changes. I must try and create an excel sheet which can factor interest rate changes.
It even gives a formula: M= P[r(1+r)^n/((1+r)^n)-1)]

https://m.drcalculator.com/mortgage/

Sniipe · 13-09-2019 4:37pm

TheChizler wrote: »

https://m.drcalculator.com/mortgage/

Thanks - I see the Int tab. I'm going to try this out and see how accurate the bank is.

Calahonda52 · 14-09-2019 10:45am

Just stumbled across this thread.
Good to see a few self proclaimed John Nash-types here.
My sense of the thread is that in the mortgage calculations, interest is compounded.

While in the OP's case this may be the case
I see it differently.
and I am no John Nash

https://www.ccpc.ie/consumers/money/mortgages/mortgage-interest-rates/
Generally, the more often the interest on your mortgage is calculated, the less you will pay in interest.

dotsman · 16-09-2019 1:36am

Wheety wrote: »

I thought interest was only paid on the balance? At first the interest is so high because the balance is at it's highest. But each month more will go off the capital and less to interest. At no point are you paying interest on interest.

Apologies if I'm way off. Can anyone confirm?

TheChizler wrote: »

Interest won't be added to a balance, or compounded, unless you miss a payment right? Depending on the loan agreement.

Sorry guys, but interest is, of course compounded. It has to be - it is on e of the basic principles of finance/lending otherwise, banks would effectively be giving you money for nothing. While different banks will do this differently, it is typically, for mortgages, calculated daily and applied quarterly (I made a mistake in my last post when I stated monthly). Not sure how other banks portray it, but for anybody with AIB, like I am, you will see interest being capitalised (i.e. added to the balance, and thus included for all daily interest calculations going forward) on the 16th of Mar, Jun, Sep & Dec.

With regards online calculators/tables mentioned, they are oversimplifying what's happening in the background.

As a side note, this is why you will typically see, in any credit agreement, that there may be a slight adjustment in your final payment, especially if you want to repay early and close off the loan. That is because they will need to manually apply all accrued interest since the last quarter and capitalise it to get the final balance.

Just for those not familiar with the terminology:
Calculated Daily - simple calculation to determine how much interest is owed on the balance as at the close of business on a given date.
Accrued Interest - each day's interest is accrued (or gathered) and stored in a suspense account until the next capitalisation date.
Capitalisation (or "Applying the Interest") - this were all the interest accrued is added to the balance (typically quarterly) to form a new balance.

TheChizler · 16-09-2019 2:08am

I don't know, my understanding is that it's set up so you're paying the interest as soon as it's due, that's why the interest to principal payment split is highest at the beginning of the mortgage and the ratio declines from then on. The bank add up all the interest charged on the principle every day for the month and present you with the bill at the end for convenience but don't add it to the principle in the interim and charge compound interest. Otherwise a graph of the interest you're charged would look like a sawtooth, rising everyday until you pay the bill and it resets back to the interest on outstanding principle only.

Hopefully that's not what's happening to the op, and they're just displaying the sum of the interest charged for the last 2 weeks. Should be easy to calculate and cross check, the formulas are standard. I think (correct me if I'm wrong) that if the two values are equal that they're not compounding it, if they were the second value would be the first plus interest.

The bank make money from interest on principle, not interest on interest unless you're in arrears.

Found this in the ts and Cs for KBC. Only applies to arrears.

Arrears
Compound interest is charged on arrears of payments and will attract interest at the
same rate applying to the loan advanced. To avoid paying such interest the arrears
must be cleared in full.

Wheety · 16-09-2019 10:29am

dotsman wrote: »

Sorry guys, but interest is, of course compounded. It has to be - it is on e of the basic principles of finance/lending otherwise, banks would effectively be giving you money for nothing.

They're not giving you money for nothing. They're charging interest.

dotsman wrote: »

While different banks will do this differently, it is typically, for mortgages, calculated daily and applied quarterly (I made a mistake in my last post when I stated monthly). Not sure how other banks portray it, but for anybody with AIB, like I am, you will see interest being capitalised (i.e. added to the balance, and thus included for all daily interest calculations going forward) on the 16th of Mar, Jun, Sep & Dec.

With regards online calculators/tables mentioned, they are oversimplifying what's happening in the background.

I checked my statement. My interest is never added to the principal.

On a mortgage of €200k over 30 years at 3.6% the monthly payment is worked out at €909.29.

At the end of the first month, the bank takes this amount and applies €600 of it to the interest from that month, the rest (€309.29) goes off the principal.

€200,000 * 0.036 = €7,200 (Interest based on principal in the first month, annualised)
€7,200 / 12 = €600 (interest for first month)

Then in the second month the balance is €200,000 - €309.29 = €199,690.71

€199,690.71 * 0.036 = €7,189 (Interest based on principal in the second month, annualised)
€7,189 / 12 = €599.07 (interest for second month)

So again the payment of €909.29 is taken but in this month €310.22 goes off the principal, and so on until the loan is cleared.

I'm not sure what AIB are doing, but KBC are not adding interest to my balance. We've never missed a payment and are not in arrears.

I know you said the online calculators are simplifying the calculation but this one exactly matched my first year of payments when the details were inputted.

https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx

dotsman · 16-09-2019 1:51pm

TheChizler wrote: »

I don't know, my understanding is that it's set up so you're paying the interest as soon as it's due, that's why the interest to principal payment split is highest at the beginning of the mortgage and the ratio declines from then on. The bank add up all the interest charged on the principle every day for the month and present you with the bill at the end for convenience but don't add it to the principle in the interim and charge compound interest. Otherwise a graph of the interest you're charged would look like a sawtooth, rising everyday until you pay the bill and it resets back to the interest on outstanding principle only.

Hopefully that's not what's happening to the op, and they're just displaying the sum of the interest charged for the last 2 weeks. Should be easy to calculate and cross check, the formulas are standard. I think (correct me if I'm wrong) that if the two values are equal that they're not compounding it, if they were the second value would be the first plus interest.

The bank make money from interest on principle, not interest on interest unless you're in arrears.

Found this in the ts and Cs for KBC. Only applies to arrears.

Wheety wrote: »

They're not giving you money for nothing. They're charging interest.

Wheety wrote: »

I checked my statement. My interest is never added to the principal.

On a mortgage of €200k over 30 years at 3.6% the monthly payment is worked out at €909.29.

At the end of the first month, the bank takes this amount and applies €600 of it to the interest from that month, the rest (€309.29) goes off the principal.

€200,000 * 0.036 = €7,200 (Interest based on principal in the first month, annualised)
€7,200 / 12 = €600 (interest for first month)

Then in the second month the balance is €200,000 - €309.29 = €199,690.71

€199,690.71 * 0.036 = €7,189 (Interest based on principal in the second month, annualised)
€7,189 / 12 = €599.07 (interest for second month)

So again the payment of €909.29 is taken but in this month €310.22 goes off the principal, and so on until the loan is cleared.

I'm not sure what AIB are doing, but KBC are not adding interest to my balance. We've never missed a payment and are not in arrears.

I know you said the online calculators are simplifying the calculation but this one exactly matched my first year of payments when the details were inputted.

https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx

Guys, we seem to be going around in circles. Please trust me on this. Every bank in the world charges compound interest. It has to. They would be losing ridiculous amounts of money if they didn't. It is the very basics of finance and the value of money. What you are seeing in your statement (or on the online mortgage calculator) is a simple view of the interest and the figures have already taken in to account any compounding.

As per above, they specifically call this out for arrears. Why? Because the moment you deviate from the current repayment schedule, it messes with the predicted compounding.

Mortgage (and loans in general) repayment figures are always simplified to enable you to pay back the same amount every month (assuming interest rates stay the same). However, there are different numbers of days in different months. Likewise, the monthly repayment date may fall on a weekend/bank holiday resulting in the repayment actually being made a few days later. Yet, the payment you make doesn't change. That is because the loan calculator has taken all this in to account and returned a simple "consistent monthly repayment" that masks all this. Believe me, designing and testing an accurate loan calculator, that accommodates complex optionality is quite challenging!

Here is a brief description of how it works: https://www.investopedia.com/ask/answers/040315/what-does-it-mean-when-interest-accrues-daily.asp

Here's, what I believe to be, a Junior Cert level maths example describing compound interest (see page 17): https://www.projectmaths.ie/documents/modulars/4/FinancialMathsExtraQuestions.pdf

In this simple case, the interest is compounded annually, i.e. added to the balance from which all future interest is calculated. In mortgages, it is much more complicated, but the same principle.

Or, think of it another way and consider your regular savings account. Whenever interest is added to the balance, you earn interest on the interest.

In case anybody hasn't guessed it yet - I kind of work in this area, so know what I'm talking about (I design IT solutions for banks, mainly in the Credit space and have worked with a number of Irish banks and financial institutes over the years).

TheChizler · 16-09-2019 10:26pm

I knew what compound interest is, the question is whether it is applied to mortgages as well as savings accounts, which is standard. I'm away and not willing nor able to do the maths right now, hopeful in a few days

Darc19 · 16-09-2019 10:42pm

This site will show you how payments work but on a monthly basis

https://www.amortization-calc.com/mortgage-calculator/

Generally interest is applied on a daily closing basis, but as mortgage payments are usually made at the beginning of the month, the apr quoted includes the compounded interest.

Similarly if you had deposits in the bank you receive compounded interest on the daily balances

At low rates, it's barely noticeable

Eg 3% annual = less than 0.01% on a daily basis.

On a new mortgage the compound is about 2c per €100,000 per day and reduces gradually over the term of the loan. But usually people pay their mortgage at the beginning of the month, so they are slightly ahead.

BTW, you can change the payment date to the 28th of each month without any issues, but the compound interest will add about 50c / €100,000 balance per month.

Snotty · 17-09-2019 1:13am

This got a lot more complicated than was needed.
Ignore when interest is applied or when payment is taken, just go on a mortgage calculator and see if the deductions/balance from your mortgage, match with the calculator.
If they match, no issue, if they don't, ombudsman

bb12 · 17-09-2019 1:42am

there was a point when i monitored my mortgage balance daily...the outstanding amount varied wildly day to day...like up 700 one day then down 300 the next day etc etc...however when i got my annual statements the total outstanding was always correct as per the amoritization calculations.

L1011 · 17-09-2019 7:54am

The addition of interest to the balance shown for mine only happens quarterly - used to be well over one month's payment so you'd see the balance jump *up* after making a payment 4 times a year!

Mortgage Calculations

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