From: Ronald Raygun 
Subject: Re: Query on Annual Mortgage Interest calculation
Newsgroups: uk.finance uk.legal
Date: Tue, 16 Sep 2003 10:07:58 GMT

john boyle wrote:

> Timothy Lee  writes
>>john boyle  writes
>>>
>>>I take your point, but you need to do it over the whole period of
>>>the mortgage, not just during the 'offer' period.
>>
>>Not necessarily, over the whole period of the tie in.
>
> Not so.
> 
> This wont work - you need to cover the whole remaining loan period.

No, I don't think that will necessarily give a fair result.

> The original poster was talking about comparing the different interest
> calculating methods. I suggested the APR & Doug Ramage suggested that
> all you need do is compare the monthly payments.
> 
> The differing calculation methods means that for an exactly similar
> monthly payment, at any given time the balance outstanding will be
> different for one interest method than for another. So if you are only
> using the monthly payments as your comparison, then you need to know
> what the payments will be AFTER the tie in period as well.

Ideally yes, but you have no way of knowing that anyway, because
they can go up and down like a yoyo at the whim of the market, or
of the MPC, and can do so during the offer and tie in periods too,
if the deals are at discounted as opposed to fixed rates.

> An interest method that has a higher balance outstanding than another
> will have a higher monthly payment AFTER the tie in period than one with
> a lower balance outstanding.

True, but the effect of that is linked to how good a deal you expect
to get by switching lenders at that point in time, and so the picture
is unfairly distorted by the assumption you build in by assuming the
tie in rate applies for the whole rest of term.

Now, it may well be the case that an APR calculated on a whole rest
of term basis for deal A will still be greater or less than that for
deal B if you re-calculate them on the basis of the same different
rate applying for the post-deal period, but I suspect this may not
necessarily be true if the two deals involve different periods.
How can you decide whether it's better to go for, say, a 2-year
small discount plus 1 year tie-in, or a 2-year big discount plus
3 year tie-in?

Also, with official APRs being truncated or rounded to whole tenths
of a percent, the comparison is pretty crude, and with rates generally
low these days, two deals can be quite different despite having the
same APR.

> So a comparison of monthly payments during
> the tie in period alone will tell you nothing.

It is only true to say that it won't in general tell you everything,
but that's very far from it telling you nothing.  In fact, when the
loan is Interest-Only, it *will* tell you everything, and when it's
Repayment, it will tell you more the shorter the deal period is in
relation to the whole remaining term, because more of the capital is
effectively interest-only.