Brendan Burgess
Founder
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- 54,768
I was asked this a few times recently, so I will attempt to explain it. It's complicated and it would help if you read "Capitalizing Arrears Explained" first.
Let's say you have a normal mortgage of €100,000 over 20 years at 5%.
Your repayments are €660 per month.
Assume you make all your repayments on time.
At the end of the first year, you will owe €97,000.
Now, lets assume you still owe €100,000, but this includes €20,000 arrears.
If you had not built up any arrears, your mortgage balance would be €80,000.
So Tanager has two correct options
1)They can capitalise the arrears. This means that you owe €100,000. With 20 years to go on your mortgage at 5%, the repayment will be €660 per month. But they will not be asking you to pay the €20k arrears.
or
2) They can insist on your paying your arrears of €20,000
If you pay the €20,000, the balance will be €80,000 and the repayments will be €530 a month.
So they have a choice
1) charge you €660 per month and write off the arrears
2) Charge you €530 a month and pursue the arrears
But Tanager did both.
They said
1) You still owe us €20k arrears
and
2) Your new repayment is €660 per month.
So you are overpaying your mortgage by €130 a month (€660 - €530)
At the end of the year, you have overpaid by €1,560 (€130 per month x 12)
So you don't owe €20,000 arrears, you owe (€20,000 - €1,560) = €18,440
The balance on your mortgage is still €97,000 - it's just the arrears balance is overstated.
Brendan
Let's say you have a normal mortgage of €100,000 over 20 years at 5%.
Your repayments are €660 per month.
Assume you make all your repayments on time.
At the end of the first year, you will owe €97,000.
Now, lets assume you still owe €100,000, but this includes €20,000 arrears.
If you had not built up any arrears, your mortgage balance would be €80,000.
So Tanager has two correct options
1)They can capitalise the arrears. This means that you owe €100,000. With 20 years to go on your mortgage at 5%, the repayment will be €660 per month. But they will not be asking you to pay the €20k arrears.
or
2) They can insist on your paying your arrears of €20,000
If you pay the €20,000, the balance will be €80,000 and the repayments will be €530 a month.
So they have a choice
1) charge you €660 per month and write off the arrears
2) Charge you €530 a month and pursue the arrears
But Tanager did both.
They said
1) You still owe us €20k arrears
and
2) Your new repayment is €660 per month.
So you are overpaying your mortgage by €130 a month (€660 - €530)
At the end of the year, you have overpaid by €1,560 (€130 per month x 12)
So you don't owe €20,000 arrears, you owe (€20,000 - €1,560) = €18,440
The balance on your mortgage is still €97,000 - it's just the arrears balance is overstated.
Brendan