Hi Emma
No. It's not illegal. It's perfectly normal.
People sometimes find it difficult to understand, but I will try to explain.
Interest is charged on the outstanding balance on the loan every day.
If your loan is €100,000 and you make your repayment of €1,000, interest will be charged on the €99,000
If you don't make your repayment, you will be charged interest on the full €100,000. So you can interpret this that you will be charged interest on the arrears of €1,000. But it forms part of the balance, so they are right to charge it.
What the Mortgage Arrears Code does not allow is for them to charge you penalty or additional interest on the arrears.
So they can't charge you 4% on the €100,000 and an extra 20% on the €1,000 in arrears.
Brendan