Money Grouse: When a rate cut means a larger mortgage

MOST mortgage payments are coming down this month following the base rate change in May. But Ted Fryer of Cheltenham was horrified to be told by his lender, the Nationwide Building Society, that his payments would be going up even though the interest on the loan had been cut.

Mr Fryer has two small mortgages with the Nationwide - one taken out to buy the house and a second taken out for home improvements. The larger of the two has less than pounds 900 outstanding and is due to be fully paid off in August 1993. The other one stands at a little less than pounds 500 and is due to be redeemed in November this year.

After the Nationwide announced its latest mortgage rate cut Mr Fryer received a letter telling him that from July his monthly payment on the pounds 900 loan would be pounds 55.01, pounds 2.39 more than the pounds 52.62 he was paying. On the other, the payments would be rising by pounds 8.10 from pounds 51.64 to pounds 59.74.

Mr Fryer's loans are both ordinary repayment loans, which means that his monthly payments are made up partly of a sum to pay off the original loan and partly of interest.

After Nationwide looked into his case, it explained that when a repayment mortgage is nearing the end of its life, an increasing amount of the monthly payment is made of capital and less of interest. So interest rate changes have a minimal impact on the monthly payments anyway.

But Mr Fryer's payments rose because, when calculating his new payments, the society looked at the balances outstanding on the loans at the end of April. It then worked out what he would need to pay from July, in order to clear the balances.

This did not take into account the payments he was due to make in May or in June. These payments would have reduced the amount outstanding on his small loans quite substantially. Because they were not taken into account, the calculations assumed he had a much larger amount to pay off from July than he actually will have.

Nationwide has now come up with much more sensible-looking figures after taking into account Mr Fryer's May and June payments.

The society's spokesman admitted the society would not have done this had Mr Fryer not queried the figures, but any over-payments would have been credited to his accounts at the end of the year or when the loan was redeemed.

Nationwide also says that it is reviewing its procedures for calculating interest so that this does not happen again.

The spokesman said: 'I think the reason this arose was that there was a long gap between when the new mortgage rate was announced and the time it came into effect. Usually a rate change takes effect shortly after it is announced.'

He added that the effect of this was magnified on small mortgages with only a short time left to run.

Mr Fryer's mortgage, which cost pounds 52.62 a month until May, now comes down to pounds 51.47, instead of the pounds 55.01 that Nationwide originally quoted, and the loan that originally cost pounds 51.64 and was due to go up to pounds 59.74 will now be pounds 49.27.

Write to Money Grouse, 40 City Road, London EC1Y 2DB. Include a daytime telephone number if possible. Please do not send original documents or SAEs as we cannot guarantee to deal with every letter personally.