Many customers with pre-1996 mortgages are getting a bad deal for their money - particularly if they make additional payments to their mortgage. One part of the small print which few borrowers read states how and when their interest payments are charged and calculated. Over the lifetime of a mortgage, this can make a substantial difference.
There are three basic variations or methods which the lenders use. The first is the old building society method under which they calculate the interest on the balance outstanding at the end of the year.
This annual calculation means 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.
For example, under the annual method, if you had a £100,000 loan at the beginning of the year and it ended up at £96,000, the average balance might have been £98,000 but the interest over the whole year would have been charged on £100,000.
Most of the lenders abandoned this in 1996 in the lead up to the Consumer Credit Act, as this would have drawn attention to what was undoubtedly a practice not to the customer's advantage. Irish Permanent abandoned it in 1991. Irish Nationwide, however, has still not abandoned this approach, while the others kept it on for existing customers. As a result, there are tens of thousands of people with pre-1996 loans with most of the lenders who pay interest on money they do not owe.
This method also penalises borrowers progressively. As the years go on in a mortgage, less interest is paid off and more of the capital balance. Large amounts can be paid off over a year and thus longer-term borrowers are penalised even more than newer ones.
The lenders themselves argue that this is based on the legal contract between themselves and the borrowers and thus cannot be changed but legal sources suggest that this is not the case.
The other methods are quite similar to one another. In these cases you simply pay the interest on what you actually owe. The interest is calculated on a daily basis. The main difference is that some charge the amount once a month, others once a quarter.
According to Felix O'Regan of the Irish Bankers Federation, charging on a quarterly basis will work out better than on a monthly basis. However, he added if the APR is the same, the cost will be the same as the APR is supposed to take into account the frequency of repayments. Most customers are also probably better off being charged quarterly than monthly, as they have the benefit of their money for longer.
EBS and First Active both charge on a monthly basis, as does ICS and Ulster Bank and Irish Permanent. All their pre-1996 customers, however, still have the old annual system. Bank of Ireland and AIB both charge quarterly. While a spokeswoman for Irish Permanent said it moved from the old annual system to a monthly system in 1991.
The monthly system is likely to be about 1p higher a month per thousand borrowed. But the difference between either of these and the old system is far larger. For example, if a borrower paid off a lump sum at the beginning of the year, they would have saved nothing in repayments until the end of the year and it would not reflect in the repayments until then.
Some people, of course, can take advantage of this and save up all their repayments until the last days of the year. However, for the majority, cash flow considerations are important and this would be simply unworkable. For example, on a rate of 5.45 per cent, the Irish Nationwide repayment is £6.95 per thousand. Under AIB's system, this would be £6.84 and the higher the rate, the larger the difference. As a result, 5.45 per cent with Irish Nationwide, or for the longer-standing customers of the former building societies, is equivalent to 5.65 per cent at AIB.
