# Interest Calculations on Refunds - Problem?



## WizardDr (16 Jan 2013)

Many lucky punters who have had a Tracker Rate restored will have received a refund from the FI.

Has anybody reviewed their calcuations?

At least one FI seems to think that the difference in payment (new one v old one) creates a difference which is 'interest refund'.

I dont think FI are supplying calaculations.

Would I be right in saying that there are in fact 3 elements to a refund:

(1) A capital adjustment based on NEW repayment v OLD repayment i.e. capital balance that it would have been had payment been correct

(2) A moneterary difference as in the cash flow differences month by month

(3) What 'rate' should be used for the time value of money? (If I recall it Brendan Burgess refrerred to the FI being obliged by Central Bank to compensate for the time value of  money also).

Has anybody ever received calculations apart from the refund?


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## Joe_90 (19 Jan 2013)

Maths and banking!!!

I've not seen how the banks compute it but to look at it from the view point of long term consistent payments.

First off as I understand it there are 2 elements: a capital and an interest repayment.
Take a loan of 250k repayable over 20 years in monthly repayments:
Rate  Monthly repayment
2% 1,264.71
3% 1,386.49

When you look at it you might say the rate of interest overcharged was 1% so therefore the refund is approx €2,500.  

But remember that you have not actually paid the interest, it was charged to the account to be paid over the entire life of the loan.  Therefore you can't expect to get a refund of interest that has not been paid.  

The actual amount of interest paid is the difference between the actual monthly repayment and the correct repayment or €121.78 per month.

On the basis that the bank owe you €121.78 since that repayment was made then there is an element of interest that you are owed with this but I would have thought that the rate would be low perhaps 2%.

Does that help or only serve to confuse the issue even more.


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## Brendan Burgess (19 Jan 2013)

Hi Dr

Step 1 is for the bank to apply the correct interest rate on your loan and to recalculate what the balance today should be. They should then issue you with a new set of statements from the time of the interest error. So you will see your repayments and the interest charged each quarter. 

You can now check this to see if it is correct. You can calculate the quarterly interest fairly easily if you are happy with a rough approximation. 

If you are happy with this, that you owe the lower balance, then  you don't absolutely need to do anything further. 

However, if they had applied the correct interest rates all the time, then your repayments would have been lower.  You have made higher repayments, so balance today is lower than it would otherwise have been. 

So,  they  should go a step further and recalculate what monthly repayments you should have made, had they used the correct interest rate and what the balance would be today with those repayments. 

You will  now have two figures

Corrected balance using correct interest rates and actual repayments: €105,000 
Corrected balance using correct interest rates and correct repayments: € 110,000

You should be offered a choice of 

1) Your balance reduced to €105,000 and no further action. 
2) Your balance reduced to €110,000 and a refund of €5,000. 

You might have a case to argue that ran up credit card debt at 15% because you were overpaying your mortgage.  I don't think that the bank would accept this so you might have to go to the Ombudsman. 

Brendan


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## Florida23 (21 Jan 2013)

Thanks for that Brendan.I had to think for a while to figure out what you meant.

What is the current protocol followed by banks?Do they give you the new lower balance or do they provide refunds and leave you with a higher balance?Pros and cons to both depending on your situation.

Like Dr above I would be interested if anyone has ever received descriptions of calculations from the banks?

Florida


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## Brendan Burgess (21 Jan 2013)

Hi Florida

It's a bit difficult ok. I have rewritten it in a more systematic manner. Does that make it clearer? 



> Like Dr above I would be interested if anyone has ever received descriptions of calculations from the banks?



What you need to see is a complete set of  new statements from the time of the error. Check that balance to see if it's correct.  If it is, then you don't need anything further. 

If you want a refund, then I am not sure what happens.


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## WizardDr (21 Jan 2013)

@BB do you know what rate would be applied for the 'time value of money' factor which stands apart from interest calclations ..and I u/stand that time value is to be compensated in addition to the actual payment difference.


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## Brendan Burgess (21 Jan 2013)

Hi Wizard

I don't see why you need a time value of money here? 

Let's assume that your mortgage has been operating correctly up to two months ago and the balance was €100,000. Then this month's statement shows that you owe €125,000 so some mistake has been made. You ring. They see the error and they issue the correct statement - say €99,800.  All sorted. No need for any adjustment. 

In a more complicated case, all they have to do is to show what the correct balance is. 

Brendan


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## Florida23 (21 Jan 2013)

It’s very clear to me now Brendan, thanks for that explanation. This is great stuff.

My situation is that I fixed for 2 years and then the bank put me on a variable rate as they wouldn’t give me my tracker back like so many others. After a few months I decided to fix for 3 years but also increased the term of the loan by 5 years thereby reducing my monthly repayment (which is less than the correct repayment based on the original term).

As a result, following your example above, the corrected balance using correct interest rates and actual repayments is *greater than* the corrected balance using correct interest rates and correct repayments. I underpaid my mortgage which is the opposite of your example. 

It is important to be aware of both scenarios. I have done up a rough calculation of both scenarios on excel so I know what ballpark figures to expect when they issue a new set of statements. If they offer me the lower balance I’ll be happy otherwise I’ll be looking for a refund.


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## Brendan Burgess (21 Jan 2013)

Florida23 said:


> I underpaid my mortgage which is the opposite of your example.



Actually, most of the cases I have seen have involved people in arrears and so they also underpaid their mortgage. 

At the moment, you owe, say,  €175k

When they redo your figures, you will owe, say, €170k. 

If they had charged the correct interest rates and if you had paid the full repayments due, your balance today would be, say € 173k.

In that situation, the correct balance today is €170k and you are due no refund. 

Brendan


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## Florida23 (22 Jan 2013)

Brendan

Would the bank have a case in insisting that the higher balance is correct as this is based on actual repayments with the correct interest rate being applied?

Florida


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## Brendan Burgess (22 Jan 2013)

No, in the example above, the correct balance is €170k.


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