22.1 Split Loan Adjustments - Redress Manager 2023

Redress Manager 2023
Split Loan Adjustments

There are two types of split loan adjustments as follows;

1. Set Loan A Balance

2. Set Variable Loan A

Set Loan A Balance is for use where the first part of the loan is to remain static.

a) Main use - Preferential rate

b) Loan A (first part) remains static unless whole loan drops below set amount

c) Loan B (second part) fluctuates, either increasing or decreasing depending on type of loan A & loan B

d) MIRAS amount adjustment should be used and set to ALL to cover all loan or Loan A/B depending on where MIRAS is applicable (If setting MIRAS for Loan B only, ensure you set the MIRAS amount for Loan A to 0).

e) If any part of loan is to be repayment then this should be Loan B (decreasing part of Loan)

f) If the outstanding balance is less than or equal to the Set Loan A Balance, then the split will be removed and the parameters of Loan A will be used.

g) If using a balance changing adjustment (e.g. Lumpsum or Accrued Fee), this will only affect the Loan B balance

Set Variable Loan A is to be used when both parts of the loan work independently.

a) Main use - Two independent parts to loan; part of loan converted to repayment; MIRAS allowance is to decrease with the loan

b) Loan A & B fluctuate independent of each other

c) If Loan A or Loan B reaches zero then the split is removed and the loan is treated as one, using the parameters of Loan A. Note that this may occur after the system has recalculated the balance used for interest.

e) It doesn’t matter if either part of the loan is repayment or interest only

*The above factors are very important when selecting the correct split loan adjustment.

The concept of being able to split a loan is very important in banking terms. If a client takes out a further advance then this may be at a different rate or in the case of staff loans, the first part of a loan may incur a lower rate.

If we applied a ‘Set loan A balance’ or ‘Set variable loan A’ to a standard loan, and apply a lower rate to ‘Loan A’, we would see the following effect:

Example A1

Loan 50,000 Interest Rate 10%

Set Loan A Balance 30,000 or Set Variable Loan A

Set Fixed Rate 5% Loan A

January 2001 31 days interest 30,000 @ 5% = 127.40

31 days interest 20,000 @ 10% = 169.86

Total = 297.26

Payment 30,000 @ 5% = 125.00

20,000 @ 10% = 166.67

Total = 291.67

When viewing the detailed output via Redress Manager®, the output is split, showing both parts of the loan. If you set the ‘loan A’ balance to zero then the split will be removed and all the remaining balance will be collated.

Warning: Amending the size of a split loan (e.g. changing it from 40,000 to 30,000) during a calculation may produce unexpected results for some lenders. This is due to some lenders using the balances from the start of the current or a previous month and the split at that time would not align with the new split.

Special Note: For split loans MIRAS defaults to Loan A, and must be changed to reflect ALL if required to be allocated to Loan A with the remaining MIRAS allocation going to Loan B. We recommend always setting MIRAS according to how it is to be proportioned (visible on output).

The adjustments include a ‘loan’ column, which allows the option to select either ‘All’, ‘Loan A’ or ‘Loan B’. This allows rates etc. to be allocated to a particular part of the mortgage. Note that only the following adjustments make use of this selection and all the other adjustments ignore it:

Fixed %

Discount %

Increase %

Capped %

Collar %

MIRAS %

MIRAS Amount

Interest Balance

Payment Balance

Working Balance

Set IBB

Change Calc Type

Payment Rate %

Payment Rate Diff %

Lumpsum

Accrued Fee

Annual Accrued Fee

Instant Override

When selecting ‘All’ for MIRAS Amount, Interest / Payment / Working Balance and Set IBB then the adjustment is split as follows:

a. When setting the figure using a positive amount, then the amount set via ‘Set loan A balance’ or ‘Set variable loan A’ is allocated initially and the remainder is then allocated to loan B.

Example

Loan 50,000

Set Loan A Balance 30,000

Set Working Balance 40,000 ALL (30,000 Loan A, 10,000 Loan B)

b. When setting the figure using a negative amount (MIRAS Amount / Set IBB excluded), then this is taken off Loan B first and then loan A.

Example

Loan 50,000

Set Loan A Balance -20,000 (30,000 Loan A, 20,000 Loan B)

Set Interest Balance -5,000 ALL (30,000 Loan A, 15,000 Loan B)

When using Loan A or Loan B then it is important to remember that initial allocations are given to Loan A (If setting Loan B to have MIRAS then remember to set Loan A to the MIRAS amount that you want it to have).

c. The ‘Change of calc type’ adjustment allows the mortgage type to be toggled from Interest Only to Repayment or vice versa. This allows for split loans where the main loan ‘Loan A’ is Interest Only and the other loan ‘Loan B’ is Repayment. The calculation method may be changed at any time and does affect the monthly-calculated payment.

Example A2

Interest Only Mortgage (Term 10 years)

Loan 50,000 Interest Rate 10%

January 2001 31 days interest = 424.66

Payment = 416.67

Example A3

Interest Only Mortgage (Term 10 Years)

Loan 50,000 Interest Rate 10%

January 2001 31 days interest = 424.66

Set Variable Loan A 30,000

Change Calc Type Loan B

Loan A payment 250.00 (Interest Calculation)

Loan B payment 271.25 (Repayment Calculation)

Total 521.25

Notes on application of adjustments

Lumpsum - this may be allocated to either Loan A (Default) or Loan B. When used with the Set Loan A Balance the reduction will come off Loan B irrelevant of which loan is specified (Loan A remaining fixed).

MIRAS Amount - this may be allocated to ALL (Loan A first with remainder to Loan B) or just Loan A / B (remainder of allocation not used; if setting for Loan B only, then MIRAS amount must be set to 0 for Loan A). This adjustment overrides the MIRAS Standard setting (use MIRAS % for percentage override) and care should be taken on historic cases (amount not always £30,000).

Accrued Fee - this may be allocated to either Loan A (Default) or Loan B. When used with the Set Loan A Balance the increase will be added to Loan B irrelevant of which loan is specified (Loan A remaining fixed).