First repayment

[houseclearou]

These questions are related to another post I have on this forum.

a) are interest payments monthly in arrears? For example is my monthly repayment based on the interest accrued in the previous month?
b) if I draw down a loan cheque on say the 10th day of the month and pay my first repayment on the 1st day of the following month. Should this first repayment be for a full month's interest or a portion of the months rent?

 

[LDFerguson]

a) are interest payments monthly in arrears? For example is my monthly repayment based on the interest accrued in the previous month?

Yes the repayment you make each month is based on the interest rate for the month preceding.

b) if I draw down a loan cheque on say the 10th day of the month and pay my first repayment on the 1st day of the following month. Should this first repayment be for a full month's interest or a portion of the months rent?

This varies from lender to lender. Many charge you interest-only from the 10th to the date of the first repayment.

Liam D. Ferguson
www.ferga.com

 

[houseclearou]

Many thanks Liam for your reply.

This varies from lender to lender. Many charge you interest-only from the 10th to the date of the first repayment.

Does this make sense? If the first repayment is for the interest accrued in the previous month then why would an interest-only amount also be required? In effect wouldn't this mean you end up paying for the same interest twice?

Do EBS refer to this interest only payment as 'interim interest'? My understanding was that interim interest would apply where say I draw down a loan on 27th June and the bank (due to the time it takes to get my account set up on their system etc.) are not in a position to seek my first repayment until the 1st August. I would then pay interim interest for 3 days at closing and make my first full repayment in August.

 

[houseclearou]

I'm still looking for a response but managed to find the following info on the web. The info reflects my understanding but can anyone confirm that the info is accurate to the Irish market and to EBS in particular ...

Interest is paid in arrears. Your monthly mortgage payment is always applied to accrued interest first, assuming your payments are up to date. In other words, your April mortgage payment will pay for March's accrued interest. Simple enough, right?

It is customary that a borrower pays for interim interest at closing. This means that if you closed on your new home loan on April 15th, there are 15 days remaining in April. Rather than make your first payment due on May 1st so you can pay that remaining 15 days interest, the lender will require you pay that interest up front at closing. This will make your first payment due on June 1st. The June 1st payment will pay for May's interest.

...

There is a couple of exceptions to this rule.....

First exception: If you close between the 1st and the 7th of the month, sometimes the lender will give you a credit for those days and require your 1st payment on the 1st of the following month. Example - If you close on April 3rd, the lender may give you 3 days worth of interest as a credit on your closing statement and then charge you 30 days interest on May 1st. This isn't always the case but it happens. More often that not, you will have the option to structure your loan this way or pay the remaining 27-28 days worth of interest in April at closing and have your first payment due on June 1st.

Second exception: Sometimes the lender will take the remaining days worth of interest and combine it with the payment that is due the month after next. Example - If you close on April 15th, there are 15 days left in the month. Rather than collect the interest for the remaining 15 days at closing, the lender will combine those 15 days worth of interest with the next months interest and collect it all with your first payment. If you close on April 15th, your June 1st payment will pay for May's interest AND the remaining days worth of interest in April. This means that your first payment will be higher than the 2nd and consecutive payments.
I hope this sheds a bit of light on interim interest (sometimes called pre-paid interest) and the way interest is paid on your home loan.

 

[Gulliver]

There is no standard in Ireland (or in most other countries) with regard to how interest is calculated or applied. In fact, many lenders have different methods of calculating or applying interest for different loans sold over the same counter. Accordingly, the rules applied by any particular lender are defined in the individual loan agreement, or in associated terms and conditions.

There are requirements that these terms and conditions should be clear and should not mislead. There are also requirements that the total loan package should conform to the APR calculation as shown in the loan agreement, but this calculation cannot always be applied to individual repayments.

Most typically, interest is calculated daily on the outstanding balance, and accumulated up to the end of a month or quarter or even year, and charged to the account at that time. This charge date might not coincide with a repayment, and so the repayment is not strictly in advance or in arrears - it is just a reduction of the balance outstanding.

There is some further discussion on this on my site but it is a complex subject.

 

[houseclearou]

Hi Gulliver

Interesting website and some useful info. My understanding is that the calculation of annual interest from the actual interest rate (rather than the APR) is straight forward and is a simple mathematical formula and is standardised. However, the calculation of the full repayment based on an APR is not so straight forward and is not standardised. But my quesiton is if a loan is taken out say on the 2nd of the month and the first repayment is scheduled for early next month then I can't see how interim interest would apply if the repayment is made. My understanding is that the interest payments are for the charge period of the previous calendar month. No one (including the bank) seem able to explain why interim interest has been applied to my parents account or why they would increase the term by a number of months without my parents consent. Originally the bank stated it was due to the currency crisis in 1992. I was able to show that this couldn't be true and they have now reverted saying it is due to 'interim interest'!