An interesting practice regarding the calculation of mortgage interest by banks and building societies was recently brought to the attention of Family Money reader Mr M from Dublin.
Mr M has a house mortgage with Ulster Bank which was taken out a few years ago. Last year, he wrote to the bank seeking information about the method of calculation of mortgage interest used for his policy: is it calculated annually or using a reducing balance method?
An annual calculation would mean the amount owed for the year is determined then divided into monthly payments. A reducing balance means interest is only paid on the amount still owed per month.
During the autumn of 1998, Mr M claims the bank told him new software had been installed to make reducing balance calculations possible. However, this new calculation method only applied to new customers.
Mr M was outraged but acknowledged that the bank is not under any contractual or legal obligation to offer this method of calculation to customers. Both the Central Bank and the Office of the Director of Consumer Affairs confirm that the bank is not in breach of any statute.
Our reader still feels hard done by the bank to which he has been a loyal customer. "It is a clear example of a cynical commercial decision which I feel ought to be brought to the attention of all Ulster Bank customers. Perhaps then the bank might review their decision which in turn would benefit many mortgage holders."
A spokeswoman for Ulster Bank confirmed that the bank is only offering reducing balance calculations to new customers. According the bank, each mortgage customer has an individual contract and their mortgage calculation is determined based on the contract's terms.
Mr M also feels it is unfair that all customers were not informed of the calculation change. The bank's spokeswoman says: "It was unnecessary to notify existing customers of the change as there wasn't any change of policy with their contracts. We must comply with the terms of their individual contract unless they're on a variable rate where the contract rate changes."
Ulster Bank says it has tried to assist this customer with his complaint. "We're flexible with written requests but this one would require the person to be independently advised by a solicitor, it would cost them money."
Changing customers from the old system to the new system would also be greatly prohibitive now and for the launch of future products, she said.
The bank acknowledges that Mr M may turn to its competitors for a different calculation method but urges him to look at the overall picture. A change will cost him money and overall Ulster's rates and terms are quite good, the spokeswoman said, adding that "Ulster Bank doesn't charge an indemnity fee or arrangement fee".
Despite these points, Ulster Bank's practice appears out of line with other banks and building societies.
Mr Felix O'Regan of the Irish Bankers Federation says that "the general situation is that interest is calculated on a daily reducing balance. That's more the case generally than the exception. Charging practice varies, it can be daily, monthly or quarterly".
Regulation of such industry practices are left to the dictation of market forces or for competition to decide, he said.
A survey of competitors reveals that Ulster Bank's calculation practices for existing customers are unusual in the industry.
National Irish Bank (NIB) and Allied Irish Bank (AIB) calculate mortgage interest on a daily reducing balance for new and existing customers. Bank of Ireland (BOI) calculates all customers' mortgages, except endowment mortgage holders, on a daily reducing balance. NIB charges monthly, AIB quarterly in arrears and BOI quarterly.
Irish Permanent calculates on a monthly reducing balance and charges monthly. First Active's calculation method is similar to Ulster Bank's. According to a spokeswoman, new customers are always calculated on a reducing monthly balance while existing customers' calculations depend on their contract terms. In general, First Active's "monthly rest mortgage", is calculated on a monthly reducing balanced and charged monthly but there are some customers with "annual rest mortgages," said the spokeswoman.
Although Mr M's options are limited, he may wish to contact the consumer credit section of the Office for Consumer Affairs which may be interested in examining why Ulster Bank's method of mortgage interest calculation is not the same as most of its competitors.
