# Are the lenders calculating the correct Time Value of Money in tracker redress cases?



## Freshstart (7 Dec 2016)

Time value of money is very interesting. PTSB most certainly did not offer that!


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## Brendan Burgess (7 Dec 2016)

Let me try to explain why I think that ptsb did compensate people for the time value of money.

Let's say my insurance company overcharged me by €100 a year ago. They refund me the money. To compensate me for the time value of money, they give me an additional €3. That is simple enough. If they don't give me the €3 , I have lost out. If they give it to me, I have been compensated.

Let's say that ptsb overcharged me €1000 on a once off basis 5 years ago.  This could have been due to an overcharge of interest or due to not crediting me with a mortgage payment I actually made. Say my mortgage balance today before correcting for the overcharge is €100,000. 

If they simply credited me with the €1,000 today and reduced my mortgage balance to €99,000, they would not be compensating me for the time value of money.

But say they went back 5 years and recalculated the statements. 
They reduced my balance 5 years ago by €1,000. 
They charged less interest each year as a result of the lower balance. 
The repayments are a matter of fact and remain the same. 
They work out that the balance today is €98,700 rather than €99,000.

So they have compensated me for the time value of money. 


Say they charged me SVR of 4% instead of a tracker of 1%.
My balance today before correction of the rate is €200,000. 
They redid the statements at the correct rate. 
The repayments I made remained the same in the recalculations. 
My corrected balance is €185,000 so I was overcharged €15,000 interest.

They are fully accounting for the time value of money.

Having said all that, I have not gone through the calculation sheets provided by ptsb. However, that is how Irish Nationwide used to calculate refunds, and I understand that ptsb did it the same way.

Their calculations were verified by an independent firm of accountants and by the Central Bank, so I would assume that they are right.

Brendan


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## Brendan Burgess (8 Dec 2016)

One could argue that as ptsb overcharged me, I had to run up expensive overdraft or credit card interest. 

That is a different argument, and one could validly claim that this should be refunded. And the appeals process would allow for this or any other consequential loss from being overcharged. 

Brendan


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## lollipop67 (8 Dec 2016)

Folks, see below a sample calculation that AIB included in pack.


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## Brendan Burgess (8 Dec 2016)

OK, I see how AIB is approaching it. 






They are not recalculating the full statement, which is what I thought that they would do. 

They are working out each month separately.

In November 2012, you were overcharged €269 interest and you overpaid by €156. 

So you overpaid €156 in Dec 2012 and have been without this money since then. They appear to be paying 1% a year interest so the TVM payment will be €156 x 4% for this payment or €6.  Then they calculate that for every month and add them up.

Brendan


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## Brendan Burgess (12 Dec 2016)

Let me take another approach to this.

1) A shop overcharged me by €1,000 one year ago.  When they refunded me the overcharge they paid me 2% interest to reflect the TVM.

2) I had a mortgage of €100,000 a year ago. The interest rate was 2%. And I was on a full payment moratorium so I paid nothing during the year.  The balance I owe today is €102,000

3) I had a mortgage of €100,000 a year ago, the interest rate was 2%. I was on a full payment moratorium. But the bank overcharged me by €10,000 a year ago.

Today the balance is €112,200 (€110,000 +2%)

Now the bank tells me that they overcharged me, so they recalculate the statement by eliminating the charge of €1,000. The balance today is €102,000.  I am back where I should have been.  No gain, no loss.

4)  Example 3 above, but this time I _chose _to make a payment of €50,000 on 1 January.

It makes no difference. I will still get a refund of €10,000 +2%. or €10,200

*A completely different example to show that overpayments don't matter*
1) I had a €100,000 mortgage on 1 January on an interest rate of 2% with 20 years remaining.
The monthly repayment was €506
The balance at the end of December was €95,900

2) The bank charged me the right interest but calculated the repayments over 10 years.
I paid €920 per month
The balance at the end of December was  €90,900

To rectify this situation, the bank simply pays me €5,000 and increases the balance back to €95,900

Brendan


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## Brendan Burgess (12 Dec 2016)

*Yet another way of looking at it...
*
I got into difficulties with my mortgage, but the bank extended the term and reduced the repayment from €920 per month to €506 per month.

As the loan is paid off more slowly, the balance outstanding is higher, and the lender earns extra interest.  This extra interest means that the lender is fully compensated for the TVM. 

There is no need for some TVM adjustment as the lender charges more interest automatically as the balance is higher.



Brendan


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## Homer (12 Dec 2016)

Brendan, if we accept that it would be difficult to claim for overdraft interest or credit card charges, then the approach outlined in your first post above is the only correct way of redressing the overcharge. What AIB are doing is inaccurate and doesn't reflect the reality of what happened.

The payments that were made are the payments that were made. Basing calculations on payments that *would* have been made if the correct interest rate had been applied is a load of rubbish. The AIB approach is unnecessarily complicated and gives an incorrect value.

If you are overcharged by a provider of services, the adjustment for the time value for money is problematic as there is no standard universal approach to determining the rate of interest that should be used. However, this complication does not arise in the case of a mortgage, because the rate of interest that *was *applied and the rate of interest that *should have been* applied are both known.

All the lender needs to do is to recalculate the balance owed allowing for the correct rate(s) of interest and the actual payments made. The difference between this figure and the amount currently shown as owed is the amount of compensation due to the borrower. This approach remains valid even if the borrower has been charging the correct interest rate for part (presumably the most recent part) of the term of the mortgage.

Where a complication arises is where the mortgage has been paid off or transferred to another lender. I think in that case, the logical approach would be to calculate the cumulative overpayment (including interest as specified above) at the date of repayment and then roll this forward at the rate the lender would be charging if the mortgage was still with them. Where this interest rate is less than the rate the borrower is now paying, a case could be made for applying this higher rate over the period since the mortgage was repaid.


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## Homer (12 Dec 2016)

Actually, on reviewing the AIB example, I think my comment above might be a bit harsh. 

Looking at the example, it's *possible *that they've calculated the time value adjustment correctly, but it's impossible to verify this from the information provided. If the pdf showed all the figures underlying their calculation, I would be able to verify this (or otherwise). I still think that their approach is unnecessarily complicated.


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## Brendan Burgess (12 Dec 2016)

Homer said:


> Looking at the example, it's *possible *that they've calculated the time value adjustment correctly, but it's impossible to verify this from the information provided.



Thanks Homer 

I got a note from AIB to say that they do it correctly and then add the TVM. 

So, in effect, they are paying the TVM  twice. 

I will get a copy of the full redone statements to check. 

Brendan


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## Bronte (13 Dec 2016)

Homer said:


> Brendan, if we accept that it would be difficult to claim for overdraft interest or credit card charges, then the approach outlined in your first post above is the only correct way of redressing the overcharge. What AIB are doing is inaccurate and doesn't reflect the reality of what happened.
> 
> .



I don't see this at all.  If because I had to over pay for my mortgage I went into overdraft in order to do so I'd expect this to be part of my compensation.


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## Homer (13 Dec 2016)

The key word in my first sentence is *if*. I was dealing with the technical aspects of how you calculate the time value of money, not making a judgement call on whether some individuals could make a case for higher interest rates being used in the calculation.

I think a strong case could be made for including an allowance for overdraft interest, particularly if the overdraft was with the same institution that provided the mortgage. Otherwise, the lender would be making a profit at the expense of the borrower.


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## Brendan Burgess (13 Dec 2016)

PadKiss said:


> at least it got included with clarity.



Hi Padraic 

It's not really a question of merits - it's a question of arithmetic. 

120,000 mortgage holders have had their mortgages rescheduled by their lenders. No change in interest rates, just the repayments were lowered.  The lenders did not turn around and ask for more money because they were deprived of the TVM. 

It's the same with ptsb's restitution programme. They have calculated it correctly.
AIB claims that they have calculated it correctly and I will take their word for it. But then they are going further and paying the TVM twice. Not sure why they are doing this.  I think that they should have increased the compensation to 20% instead. 

Brendan


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