Payment not being applied to reduce principal on a variable mortgage

R

Redone

Registered User
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Hello,

The loan is a mortgage, but I thought this was still the best place to ask this question.

I paid a lump directly into my mortgage account and assumed that it would automatically reduce the interest accruing. I since found out it wasn't.

I'm at the stage where I have the final letter from the financial institute. They acknowledged it was a variable account, but because I didn't inform them to reduce the principal they weren't required to offset.

I sent a general inquiry to the Financial Ombudsman and they said they couldn't answer the above unless I submitted a full application as they don't give advice.

Has anyone here come across this before, a bank not applying a lump sum payment against the principal and charged higher interest?

Is there a case (in your non binding opinion :) ) - or do I need to suck it up?

Thanks
 
Redone said:
I sent a general inquiry to the Financial Ombudsman
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If you want to take it to Ombudsman you have to make it clear in writing with the fund that you are making a complaint. If you don't like their response you can take it to the Ombudsman then. If the fund doesn't respond in a reasonable period (a month) you can take it to the Ombudsman either. But the Ombudsman will only deal with you when you have exhausted the process with the fund.

(I presume Ombudsman is competent with a non-bank, but also check this with them too).
 
Hi, yes the ombudsman has jurisdiction. I'm at that stage with the VF already. Final letter issued and I can go to the ombudsman. Wondering what others think about the situation - not having lump sum applied to principal.
 
Redone said:
Vulture fund, I've been with them for 6/7 years. Never sold on.
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I'm going to assume it was an ex INBS mortgage?

Unfortunately I'm not familiar with them, but the contract should say how overpayments are treated. I do know they had a weird way of processing them, but I've no idea what your contract says.

The reason I asked if it was a bank is I have it in the back of my mind that because the fund isn't a deposit taker, they are not allowed to hold credits so should have either returned the money to you or asked you what you wanted to do with it. But I could be mixing that up.
 
Redone said:
Hi, yes the ombudsman has jurisdiction. I'm at that stage with the VF already. Final letter issued and I can go to the ombudsman. Wondering what others think about the situation - not having lump sum applied to principal.
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My advice is to skip the offer of mediation if there is one, it is a waste of time for something like this, and go straight to adjudication.
 
I have heard about people paying lump sums off their mortgage and not having anything done with the lump sum until year end, or people being told, oh we just thought you wanted to used the lump sum as a credit to pay off the monthly payments. So you need to be clear to the mortgage company what you would like them to do with the lump sum. ie reduce the capital and shorten the length of the loan or reduce the capital but keep the mortgage length the same so recalculate the monthly payment.

How long did it go on before you noticed, a month, a year, a few years? The statements should be reviewed very carefully for stuff like this.

Your mortgage contract should state if you were able to make lump sum payments off the principal, some don't allow it.
The mortgage company generally have specific forms to fill in to instruct them what to do with lump sums if allowed
It sounds like you gave them no instructions so they may have decided just to wait for instructions.
 
With our Ulster Ban mortgage, when we overpaid we had to ring them each year and ask them to reduce the mortgage principal by the overpayment amount. It did not happen automatically.
 
Sorry for the stupid question, but suppose you make a one-off lump-sum payment to your mortgage account and continue you to make the scheduled monthly repayments. What does the bank/fund think you meant to do by this? Does the bank/fund assume as default that people are making an interest-free prepayment so at some future point they can pause scheduled repayments?

To me the logical assumption by the bank/fund should be that you meant to reduce the balance. But maybe there's a reason why they generally need specific instruction on how to treat it.
 
Redone said:
I paid a lump directly into my mortgage account and assumed that it would automatically reduce the interest accruing. I since found out it wasn't.
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Are you sure about this? You might be right, but I find it very hard to believe.

People get confused all the time. Their payment remains the same, so they think that the interest has not been reduced. But the interest has been reduced and the monthly repayment has less interest and more capital.

Brendan
 
It's actually very easy to check although most people find mortgage statements intimidating.

If you want to post a copy of the statement for the year showing the capital repayment, we should be able to confirm that they did not reduce the balance when calculating the interest.

Brendan
 
RedOnion said:
I'm going to assume it was an ex INBS mortgage?

.... I do know they had a weird way of processing them, but I've no idea what your contract says.
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I have analysed many INBS statements over the years.
The only odd thing is that interest was calculated on the "annual rest basis"

So let's say the rate was 10% and the balance was €100,000 on 1 January 2000.
On the 1 January, they charged your account with €10,000 interest i.e. the interest for the full year.

But if you made a capital repayment of €10,000 on 1 July, you got an "interest credit" of €500.

So even customers of INBS got full credit for capital repayments.

Likewise, if the interest rate was reduced, there would have been an interest credit.

Brendan
 
I think I've inserted the relevant quotes.

Hello Brendan,

Yes, I'm sure. I did the calculations myself (Interest based on Principal with and without reducing by lump sum) - I sent them to Pepper also. It is INBS. Clamball has it right, Pepper said (I'm at work, paraphrasing) we didn't know what to do with the lump sum you never told us. No interest reduction was granted.

I've made early payments recently, the largest was over two years ago, so might be statute barred, but it's the general principle and have they done it to other people.

The way they do the interest charge is not what I expected. I make a payment mid month and the principal and interest is reduced for the rest of the month. At the start of the month they add the Interest charged in the prior month back onto the principal and the daily interest rate increases marginally until the next payment. Rinse and repeat.
 
Clamball said:
I have heard about people paying lump sums off their mortgage and not having anything done with the lump sum until year end, or people being told, oh we just thought you wanted to used the lump sum as a credit to pay off the monthly payments. So you need to be clear to the mortgage company what you would like them to do with the lump sum. ie reduce the capital and shorten the length of the loan or reduce the capital but keep the mortgage length the same so recalculate the monthly payment.

How long did it go on before you noticed, a month, a year, a few years? The statements should be reviewed very carefully for stuff like this.

Your mortgage contract should state if you were able to make lump sum payments off the principal, some don't allow it.
The mortgage company generally have specific forms to fill in to instruct them what to do with lump sums if allowed
It sounds like you gave them no instructions so they may have decided just to wait for instructions.
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Brendan Burgess said:
Are you sure about this? You might be right, but I find it very hard to believe.

People get confused all the time. Their payment remains the same, so they think that the interest has not been reduced. But the interest has been reduced and the monthly repayment has less interest and more capital.

Brendan
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Sorry, I messed up the quotes, I meant to add to the above response. ^^^
 
Redone said:
The way they do the interest charge is not what I expected. I make a payment mid month and the principal and interest is reduced for the rest of the month. At the start of the month they add the Interest charged in the prior month back onto the principal and the daily interest rate increases marginally until the next payment. Rinse and repeat.
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That part sounds correct (I'm assuming you mean daily interest amount rather than rate). It's how every bank does it, but it's different to what INBS did.

I'd happily have a look at a statement for you if you wanted to share it.
 
RedOnion said:
That part sounds correct (I'm assuming you mean daily interest amount rather than rate). It's how every bank does it, but it's different to what INBS did.

I'd happily have a look at a statement for you if you wanted to share it.
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Thanks. Yes, the daily rate. I'm used to dealing with loans and interest for work, just not on a daily basis., but over the life of the loan.

The only question remains is if they are allowed to ignore an amount that's paid early if specifically told for it not to reduce the principal. I may have the contract somewhere, but would take some time in the attic. But, from what you say it sounds plausible that they could be allowed to do this? What would I be looking for in the contract if this was possible, what kind of wording? Thanks for your time on this.
 
We overpaid with KBC for a year last year and it knocked down the principal

Very easy, annoyed now they are leaving the market.

Banks are playing games with small punters.
 
Redone said:
The only question remains is if they are allowed to ignore an amount that's paid early if specifically told for it not to reduce the principal.
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A bank cannot charge interest on more than the balance, no matter what the contract says.

The Central Bank would come down heavily on them if they are doing this.

And the Ombudsman has a wide discretion on making sure that customers are treated fairly and not just legally.

Brendan
 
Redone said:
Thanks. Yes, the daily rate. I'm used to dealing with loans and interest for work, just not on a daily basis., but over the life of the loan.

The only question remains is if they are allowed to ignore an amount that's paid early if specifically told for it not to reduce the principal. I may have the contract somewhere, but would take some time in the attic. But, from what you say it sounds plausible that they could be allowed to do this? What would I be looking for in the contract if this was possible, what kind of wording? Thanks for your time on this.
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Wondering how you got on ?
I called Pepper recently to enquire as to how they handle regular overpayments or one off payments.
My husband in an earlier call (same afternoon) had been told that they do not accept overpayments. I spoke to a different person and it took a great deal of time on the phone to ascertain the following:
Pepper will only credit your account if your overpayments reach €1,000
Pepper will only make this adjustment if you write to them and the letter is signed by both parties to the mortgage. You have to request that the overpayment be off set against the term of the loan.
(An aside Pepper were stressing that I could over pay either by lump sum or additional monthly payments and that the money would stay in a repayment account and then when the repayment account amount was sufficient to clear the mortgage they would do that. They also told me that their preferred scheme worked out the same as the overpayment being made to reduce the term ( in writing)

My mortgage was with NIB, then Danske and is now managed by Pepper.

I seem to remember that you could make overpayments to Danske and the term was recalculated as soon as the overpayment was made and that there was no waiting for the trigger of €1,000 be made or the need for a letter to be sent to them.

Does anyone know if the contract with NIB stated how overpayments were treated ?
 
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