My third attempt at explaining refunds and account adjustments...

[Brendan Burgess]

OK, I will simplify it as much as possible.

Imagine an interest only loan

€100,000 @ 10% APR

You will be charged €10,000 interest.
You will make repayments totalling €10,000.
At the end of year one, the balance will be €100,000 as it's interest only.

Then the lender discovers that you should have been charged 1%.
They reduce the interest charge to €1,000.

You have been overcharged €9,000 and they send you a cheque for this.
The balance remains at €100,000 which is what it would have been anyway.

Summary:

Now take a repayment loan of €100,000 @10% over 10 years.

With a repayment loan, each monthly payment includes interest and some repayment of capital.

Again, they discover at the end of Year 1, that they applied the incorrect interest rate to your account.

You are in exactly the same position as you would have been had they charged you correctly from the start. You owe them €90,500 and you have €5,400 sitting in your current account, not theirs.

The key point to understand is that the lower the interest rate, the more capital is paid off with each repayment, which is why you will need a balance adjustment downwards after the interest rate is reduced.

 

[Bronte]

So at 10%.

A couple repaid 15, 800 in the year (capital and interest of 9700) but of course the interest is a cost and is added back leaving one owing 93900

100,000 + interest of 9700 = 109700 less monthly repayment totalling 15800 = 93, 900.

Note: the reason the 10% interest is not 10,000 is because each month your capital amount owing is reducing. So you've a figure of 9700 instead.

For the 1%

It's the exact same calculation.

But what do people get back.

They don't get the 8800 overcharged interest because they would have paid an extra 3400 in capital if they had been charged correctly.

So they get back 8800 - 3400 - 5400. (But really they are getting the 8800, just some of it is going off their mortgage).

 

[Brendan Burgess]

Bronte

Thanks for that interpretation - it helps clarify it even further.

And thanks for pointing out the typo. I have fixed it and edited your post accordingly.

Brendan

 

[Emmet Doyle]

Bronte

Thanks for that interpretation - it helps clarify it even further.

And thanks for pointing out the typo. I have fixed it and edited your post accordingly.

Brendan

Hi Brendan
A quick question that occurred, would or should it not be an option for each customer to have these net overpayments applied retrospectively to their mortgage in real time as it was paid. (i.e. monthly)
My reason for this though is as follows, if I regularly overpay my mortgage it reduces the capital owed and subsequent interest paid or term. Therefore in this particular case the actual level of redress would be far greater as the amended mortgage balance now would be significantly lower as the actual amount of interest paid and subsequently reversed would be higher. I hope I articulated that sufficiently well.

 

[Brendan Burgess]

Hi Emmet

Sorry, I don't follow that. Could you give a simple example of maybe one overpayment to illustrate your point.

Brendan

 

[Bronte]

Thanks for that interpretation - it helps clarify it even further.

That's good as I was worried I might be making it more complicated. But I do know this I don't look at figures the same way as others, it's just a matter of 'interpretation' as you pointed out. So even though I like your tables, I cannot do them myself as for some reason they confuse me until I figure them out. I guess it's the way one learns maths/accountancy.

For those getting redress, I'd like them to get an amortisation table for each year with the new rate of interest - they should already have the annual statements showing what actually happened to compare it to. At least I'd hope so ! In any case if they don't PTSB should supply them.