asked the Minister for the Environment if he is aware that although the mortgage rate quoted by building societies for loans of up to £20,000 is 14.15 per cent the actual rate charged is 15.4 per cent and that for loans over £20,000 the rate quoted is 15.15 per cent while the rate charged is 16.5 per cent; and if he will make a statement on the matter.
Written Answers. - Building Society Mortgage Rates.
293.
I am aware that there is a difference between the nominal and the actual rate of interest paid on loans from building societies. I understand that this arises because mortgage interest is calculated for the whole year on the amount of capital outstanding at the beginning of the year and that this system of charging interest, of which borrowers are fully aware, is well established practice, has considerable administrative simplicity and to change it would not in practice help borrowers.
I understand also that the apparent difference between the nominal and actual rate of interest holds true only if all loan repayments are paid on the due date. This, of course, is not the case and societies, unlike many other financial institutions, treat loan repayments which are paid within a month of becoming due as being paid on the due date. In practice, therefore, the difference between the nominal and the actual rate of interest is reduced.