Question:
I have an existing variable interest home loan which has been running for approx 16 years. It is an investment loan so I have not made any additional payments throughout this period. The repayments are based on principal and interest and fluctuate according to the banks variable rate.

Recently I received a letter from the bank stating that the interest rate on my loan had been reduced to 6.13% and my new monthly payment would be $1413. I decided to check this against earlier statements when my interest rate was 6.29% back in 2003, which showed a lower monthly payment of $1390.

This does not make any sense to me as the term of the loan has not changed and the monthly payment is now higher than it was in 2003 when the interest rate was slightly higher than my new rate.

I queried this with the bank and their response was that the loan is recalculated each time the rate changes and that since the loan is now over a shorter term (being that there is 9 years remaining from a 25 year term) the payment indicated in the letter is correct.

Further, they also said if I used their online calculator it would confirm this, which it did, however when I applied the same to other online calculators the payment was lower.

Can you tell me if what the bank are telling me is correct and if it is not how should I progress this further with them.

 

Answer:
Obviously the term will vary if the rate changes and the payments are unchanged, but you should be able to do a manual calculation each month to verify what the bank's computer charged you. 

I would be extremely surprised if there was an error, but when you do long term comparative calculations, a different outcome can be produced if payments are made at the start of the month, the middle of the month, or the end of the month.  I'm sure if you sit down with your friendly bank manager, they will be able to go through things with you.