Bank overcharging mortgage interest / formula question

[timnollan]

Happy Saturday AusFinancers.

Bit of a query around my mortgage and the amount of interest charged.

I’m with one of the Big 4 and, in late 2023, changed my mortgage offset account from my transaction account/cash hub to my emergency fund as I’ve been disciplined enough to get it to five digits for the first time in my life. I’m a bit of a data nerd and have been tracking my transactions across all my accounts for the last 18 months which has helped massively with keeping me accountable.

I logged in today to export my January transactions and saw that the interest changed for my mortgage was significantly higher than what it had been previously. Wondering why this was, I asked my partner, who is an accountant, to help me double check the calculations.

We calculated that the amount that I should have been charged in interest as > $100 less than the actual interest charged. That’s without even taking the offset or my fortnightly repayments into consideration.

We calculated it using both cumulative and compounding interest formulas.

((P x R) / T) = Interest (daily)

P = Principal
R = rate as a decimal - 0.0619
T = 365

($365,443 x 0.0619) = $22,620.9217
$22,620.9217 / 365 = $61.9751

Interest x 31 (days in January)

= $1,921.23

We also figured we’d try a compounding interest formula for shits and giggles:

A = P(1 + r/n)[sup]tn[/sup]

A = Future Value
P = Principal ($365,443)
r = rate as a decimal (0.0619)
t = time in years (see below)
n = Number of times interest is compounded per year 365

When we used t = (1 / 365) * 31 days
= 0.085

The amount came to $1,927.68

However, when we used 0.09 (for shits and giggles and to test a theory), the amount came to $2,041.39

This is the amount of interest I was charged.

WTF… can anyone confirm/elaborate?

Do the banks genuinely only use two decimal places for their interest calculations?! If so, how is this allowed?

Secondly, how and why would I have been charged that amount when the amount I have in my emergency fund should have offset some of it?

Very confused and not looking forward to having to call the bank on Monday.

 

[epicpaymentsny]

@timnollan Applying Occam's razor here, it's extraordinarily unlikely the bank is overcharging you interest. If they were it wouldnt just be you and it would be an absolute shit storm that someone would have noticed by now.

 

[timnollan]

@epicpaymentsny NAB were found to have done this previously:

https://asic.gov.au/about-asic/news...lion-for-overcharging-interest-on-home-loans/

 

[epicpaymentsny]

@timnollan If you read the article they weren't calculating interest wrong, they just didn't link offset accounts

 

[timnollan]

@epicpaymentsny Yes you’re right that it’s not a miscalculation that caused the overcharge. I realise I didn’t articulate what I was trying to emphasise enough; that not linking an offset so that the account holder is charged more interest is still an overcharge and that banks aren’t motivated to fix issues like this if they might potentially profit from it not being picked up. A fine is just the price you pay if you get caught.

 

[pipersopus]

@timnollan Not only Nab but they are the ones who made the news at the time.

 

[mcflyguy22]

@timnollan I have previously picked up my bank failed to apply my offset account contact them and ask them to check it, they should be able to provide you an explanation. If you do it via email I'd suggest you will get a better response

 

[orangeoil143]

@mcflyguy22 I and another family member had exactly the same thing happen to each of us. I picked it up after about 2 months with ING. Family member took years and got 17k back from NAB with a bit of a fight.

 

[timnollan]

@mcflyguy22 Thank you. I’ll email my bank now

 

[johnlarsensmith]

@timnollan What day was your interest charged previous month? Was it carry over days from that previous month's charge? Maybe 2-3 days extra interest added on to this month's bill potentially...

 

[johnlarsensmith]

Just looked - Friday 29th you would of been slugged. Then the days of Sat/Sun 30th/31st would of carried over to last month.

 

[timnollan]

@johnlarsensmith Ah, this is a good catch! The last interest charge was 29/12. I’ll still follow up with them but this could potentially be why.

 

[coolpeeps]

@timnollan Don’t trust your partner accountant either, less giggles more accuracy

 

[timnollan]

@coolpeeps Mind you, he was gaming at the time and more or less just letting me rant while confirming that the formulas I was feeding him were correct.

I’m genuinely sure that if I got him to sit down and give it his full attention, that he would have indicated this was a possibility. But it’s also Saturday after a big work week so I wasn’t going to force that

 

[pddan]

@timnollan You don't calculate for the 31 days in Jan. You calculate for the number of days from the previous month and same date.

E.g. if you were charged interest on the 30th of Jan, you are charged interest each day from the 30th December. If its Feb, I suspect it'll be the 29th.

 

[neonbelly99]

@timnollan I had a similar issue a few years ago - apparently my offset account was not linked correctly somewhere in their system.

Took a few emails back an forth to figure it out, but they have fixed the issue and recalculated all interest from day 1.