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Complex ERC calculation


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Hello all.

 

I have searched and read through many threads in this forum but have not been able to find anything relevant to my situation.

 

I was forced to pay Barclays an early repayment charge last year when redeeming a fixed rate mortgage. Unlike most of the cases on here, there was no period of reduced rate and the early repayment charge was not transparent at the outset of the mortgage. The way the interest was calculated involved the use of variables that Barclays decided upon at the time of repayment and the calculation was described by Barclays mortgage staff as being “complex”.

 

As I said, I could not find anything similar on the forum and if I have missed it I would be grateful if somebody could post a link. Otherwise, I will post more details for the opinions of the forum.

 

Many Thanks

H

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H, a fixed rate mortgage can be considered to have an embedded derivative product, an interest rate swap.

 

It is possible to value an interest rate swap using future predicted interest rates (yield curves) and knowledge of the two interest rates which are being swapped and the principal (ie. your outstanding mortgage).

 

Barclays may have done this (I very much doubt it) and should have no reason for not providing you with copies of their calculations if the charge was a genuine pre-estimate.

 

If you're written to them and they wont disclose their calculations, this brings us right back to the situation the majority of people on here have found themselves in - the mortgage provider will not disclose how the charge was calculated so as to represent a genuine pre-estimate ot their loss and we end up claiming through the courts.

 

I would suggest the fact the charge was not transparent at the outset will give rise to many more avenues for disputing this charge, although my knowledge is limited in this respect.

All advice is offered in good faith based on my own research and understanding of the laws involved, however I'm not a lawyer!

 

Please dont rely on annoymous advice posted on a public forum without checking it out for yourself first!

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I would suggest the fact the charge was not transparent at the outset will give rise to many more avenues for disputing this charge, although my knowledge is limited in this respect.

 

Agree with you completely there.

Please note that I am not a legal expert and all advice given is without prejudice and is purely my opinion only.

 

** Nationwide - £1821.15-PAID IN FULL - Aug 06 **

** Halifax Mortgage -£390 - PAID IN FULL - Nov 06 **

Lloyds TSB - MCOL issued 09/03/07 - £2953 + costs - ON HOLD....

 

 

 

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H, could you post up what details you have on the charge from your contract - this may enable more people to help... (there must be something!)

All advice is offered in good faith based on my own research and understanding of the laws involved, however I'm not a lawyer!

 

Please dont rely on annoymous advice posted on a public forum without checking it out for yourself first!

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Many thanks for the replies so far, but I guess there is nothing similar on the forum.

 

I have copied and attached below the response I received from Barclays when I questioned their Early Repayment Interest (ERI). A couple of points about this:

 

Discount Rate - I have no idea how this is derived and the person I spoke to in Barclays mortgage department had no idea either.

 

Before I received the calculation below, I was advised by Barclays mortgage department that this was a complex calculation and this formed part of my original complaint. In reply, the Senior Customer Relations Manager claimed he was sorry I was told that this calculation was complex. He went on to say "This should not have happened, firstly because it is not good customer service, and secondly because the actual ERI calculation is not that difficult to understand. I'm very sorry that this excuse was given to you it is absolutely inexcusable".

 

He then went on to demonstrate how simple it was by getting it wrong. In his subsequent apology, he got it wrong again. He eventually gave up and photocopied the below and sent me that.

 

Also, because it took Barclays 3 months to provide my new lender with a redemption figure (another claim perhaps?), the penalty I eventually paid was a bit lower than that shown.

 

Kind Regards

H

 

**************************************

 

Amount being repaid x (Fixed Rate – "Interest Rate") x Months/12

 

Where:

 

Fixed Rate = your fixed interest rate.

 

Interest Rate = The fixed interest rate at which we would provide a mortgage for the remainder of the existing fixed rate period, to a new customer. If we are not offering any equivalent fixed rate periods, we use a reasonable estimate of what this interest rate would be.

 

Months = The number of complete months from the date of early repayment to the end of the fixed rate period.

 

Using this formula, the early repayment interest shown on your mortgage statement dated 16th February 2005 was calculated as follows:

 

£59,904.51 x (7.19% - 5.6058%) x 37/12 = £2,926.10

 

We also reduce the early repayment interest by an amount which represents the benefit to us of receiving interest earlier than we would have done if you had not repaid early. It may be useful to use a scientific calculator to follow the equation which follows. Details of how the reduced early repayment interest is calculated is shown below:

 

Early Repayment Interest £2,926.10

Discount Rate 4% (which may change on a monthly basis)

Months Remaining Until End of Interest Rate 37

 

Discounted Amount = Early Repayment Interest / ((1+(Discount Rate / 12)) ^ Months Remaining On Rate)

 

E.G. Discounted Amount = £2,926.10 / ((1+(4% / 12)) ^ 37) = £2,587.11

 

Please note that the ^ symbol represents the equation - to the power of.

 

**************************************

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