How is daily mortgage interest calculated in a Leap Year?

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delly.x

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This may be a very minor thing, but I have worked out that Pepper are applying incorrect interest for the current year of 2024. I will share my calculations and ask if anybody else might be able to verify as well. I will say that the amount is very, very small, but with tens of thousands of mortgages that Pepper have, I'm sure it equates to a 7 figure sum.

Okay, so here is the breakdown, which I have rounded for simplicity.
Say I have €200,000 outstanding and my interest rate is 8.0%. According to the online Pepper portal, they will apply €43.84 interest to my balance for that specific day. €43.84 x 365 = €16,001.60, which would be my 8% if that amount remained static for the year. However, as 2024 is a leap year, the actual amount of interest that Pepper should apply is €43.72 for that specific day. €43.72 x 366 = €16,001.52.

So I work out that I am being charged roughly €43 extra for the year, and I have checked the 29th of Feb, they added their daily interest on that day as well. They say that Pepper service 130,000 mortgages, while they are all different values, if that was €43 for each mortgages, that amounts to five and a half million euro.

For anyone not on Pepper, their online portal changes each day with the amount you owe. I am an excel nerd and enter it into a spreadsheet and with some auto calculations, was able to establish the pattern of incorrect interest charges. Is there anybody else who might be bale to verify they are in the same boat?
 
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The interest is normally calculated daily on the outstanding balance and applied to the account monthly.
So if there is an extra day in the year, you are charged the interest for that day.

You can't start with the annual interest and work backwards which is what it seems you are doing for the leap year case.
 
Most of the banks do it this way, but I think it's wrong.


If the interest rate in 2023 was 8%, the daily rate should be 8/365

In 2024, the daily rate should be 8/366.

Coincidentally I was just trying to figure out the interest calculation on an AIB statement and they do it the same way as Pepper. I had changed it to 8/366 for the leap years and my figures were out. When I changed it back to 365, I matched their figures.

Brendan
 
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Bank of Scotland issued refunds to people because of this.

Bank of Scotland sending out small cheques for overcharging in a leap year?

https://twitter.com/philipnolan1/status/1075047298139414538 I find Twitter hard to follow. But I am told that this refers to an error BoSI made some years ago in charging 366 days interest of 1/365th in a leap year. Has anyone else heard about this? Brendan
www.askaboutmoney.com
 

Leap year impact on mortgage repayments

Quick question about 2008. I recently received a nice letter form my mortgage lender advising me that they had made a technical over site and never applied interest to my account for Feb 29th! They are now happy to inform me that a correction is to be applied to my account and they have provided...
www.askaboutmoney.com
 
www.independent.ie

Greed jumps in as a leap year means day more in mortgage interest

THE "naked greed" of some of the country's financial institutions was attacked yesterday as it emerged that many homeowners would see an increase on last month's mortgage bill because of the leap year.
www.independent.ie www.independent.ie

Most of the financial institutions charge interest by the day and confirmed yesterday that because of February's extra day this year, there would be an increase in mortgage payments.

The increase emerged after IIB Homeloans sent a letter to its customers informing them that the extra charge would arise.

When contacted, most of the other banks and building societies confirmed they too would be enforcing the leap year payment but also pointed out that deposit customers would receive an extra day's interest this year.
 
Thanks Richie

I bow to ClubMan myself, but what does that tell us?

PDF page 65.

1710628064018.png
 
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Thanks for the replies everybody, interesting and not surprising to see it has come up with other institutions in the past.

1710629293234.png

I'm taking that to mean if your agreement is setup to work on monthly calculations, that regardless of it being a leap year, it remains 12 equal months.

In the case of Pepper, it is done on a daily basis, so this year should be counted as 366, which is perfectly fine, however they have taken the 366 in one sense (adding 366 instances of interest), but not in others (basing that interest amount on 365 days. As I said at the start, the amount is very small, but there is a principal here, as well as Pepper collectively taking an extra €5m.

Not that I like to rock the boat with Pepper, what with my mortgage being in a specific set of circumstances, but I will followup with them and hope that someone on the other end of the line understands what I am talking about. If they say it is correct, then I might then get onto the regulator.
 
Banks often mention months and monthly interest but still calculate interest by the day. So 28, 29, 30 and 31 day months all produce different interest figures. And then they recapitalze the interest at differing intervals to further confuse us mere mortals. Monthly, quarterly etc.
And I vaguely remember something about APR from 20 or 30 years ago.
Quoted interest rates always differed from APR. I can't remember why though.
 
Also there is a formula in schedule 3 from which (I think) you can work out anything about your loan agreement by rearranging things.
But it looks different from the amortisation formulas that Excel (and I) use for interest calculations.
 
RichInSpirit said:
Quoted interest rates always differed from APR. I can't remember why though.
Click to expand...

Say that the nominal rate is 12 % and you borrow €100,000 on 1 January...
If they charged you €12,000 interest on the €100,000 on 31 December, the APR would be 12%.
But let's say that they charge you 1% a month.
On 1 January, your balance will be €101,000.
At the end of February, the interest will be €1,010 etc.
So the APR will be a bit higher than 12%.

Brendan
 
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