Dynamic Mortgages

Dynamic mortgage products are a type of capital repayment loan featuring equal installments and interest that is calculated on the principal + interest outstanding. These products share many characteristics with standard dynamic term loans that also have regular payments and interest calculated on principal + interest.

Dynamic mortgages make use of the equal installments logic, which is common with standard Declining Balance Equal Installment (DBEI) loans. Dynamic mortgages support two types of interest calculation: simple interest and compound interest with daily rest.

The method for calculating the monthly equal installments and the interest itself differs based on the interest type. Here are the formulas used:

Simple interest

• The monthly equal installment is calculated using the PMT function:
  PMT=PMT(IR/12,No. of installments,−Principal balance)
• Interest is computed using the formula:
  (Principal balance+Interest Balance ) * IR%/Day count convention * No. of days in the interval
  • For subsequent interest computations, only interest that has been applied but not yet paid is considered.
  • If the Decouple interest from arrears option is set to true, the interest balance will not be included in subsequent interest calculations. This prevents issues with duplicated interest in arrears amounts.

Compound interest

• The monthly equal installment is calculated using the PMT function:
  PMT=PMT(Daily IR ,No of installments/12*Days in year ,-Loan amount)*Days in year/12
• Interest is computed using the formula:
  Opening balance *((1+Daily IR)^(Number of days in interval)-1)

For more information on compound interest, refer to Compound interest with daily rest.

Calculating schedules for dynamic mortgages with equal installments

The schedule for a dynamic mortgage is calculated using the following steps:

1. PMT calculation: The monthly payment (PMT) is determined.
2. Interest calculation: Interest for the specific installment period is calculated.
3. Principal calculation: The principal portion of the payment is calculated by subtracting the computed interest amount from the PMT.

For this loan type, the final installment serves as an adjustment installment. This means that you will have equal installments from the first until the (n-1)th installment. The last installment - the nth installment - is then calculated as the *remaining principal balance + interest accrued for that specific period. Typically, this final installment's total due amount will differ from the preceding equal installments.

Adjustable interest rates and dynamic mortgages

Dynamic mortgage loans are compatible with adjustable interest rates. This inherent flexibility allows lenders to configure a product that can incorporate multiple interest rate types, such as fixed and variable rates, enabling them to define as many distinct interest rates as needed.

The variable interest rate, often referred to as an index interest rate within Mambu, is composed of two key elements:

• A source value, such as the Bank of England base rate.
• A spread, which is an additional percentage added to the source value.

This structure provides a robust framework for managing fluctuating interest rates throughout the loan's lifecycle. For more information, refer to adjustable interest rates.

Note that negative spread functionality is not supported for dynamic mortgages.

Prepayment and overpayments in dynamic mortgages

For dynamic mortgage products, prepayments and overpayments are generally allocated to the upcoming pending installment. The precise behavior of how an installment is marked as paid is governed by the product configuration setting, specifically whether the system is set to mark an installment as paid when the principal expected or the full due amount is paid. This configuration significantly influences the subsequent calculations and overall behavior at the schedule level.

Dynamic mortgage products support the same prepayment recalculation methods as standard Dynamic Term loans configured with Equal Installments. These methods determine how an overpayment impacts the loan schedule and include:

• Reduce amount per installment: When this method is selected at the account level and an overpayment occurs, the loan schedule is recalculated by adjusting (reducing) the Payment (PMT) of all remaining installments.
• Reduce number of installments: If this method is chosen at the account level, an overpayment will lead to a schedule recalculation by reducing the total number of installments from the end of the loan term.

Overpayment in principal balance

The overpayment in principal balance configuration for dynamic mortgages does not have an installment allocation, unlike standard prepayments. Instead, the installment is allocated exclusively to the principal balance. This direct principal reduction triggers an immediate schedule recalculation, which then adjusts future payments or the loan term based on the prepayment recalculation method configured at the account level.

For more information, refer to Principal Overpayment.

Custom repayments

One of the most important features of dynamic mortgages is the custom repayments functionality. This is an advanced capability that extends the standard repayment process, allowing users to override the default payment allocation method configured at the product level.

Custom repayments enable precise control over how funds are applied, allowing payments to be directed towards specific items such as:

• Principal
• Regular interest
• Interest from arrears
• Fees
• Other configured items.

This option becomes mandatory under specific circumstances:

• Whenever interest from arrears is decoupled from the regular repayment schedule.
• When other items, such as certain fees - such as non-interest bearing, interest-bearing - are decoupled from the standard repayment schedule.

All balances that are decoupled from the regular repayment schedule are exclusively payable via custom repayments, providing the necessary flexibility for their settlement.

Custom repayment API details can be found in the CustomPaymentAmount object.

Unsupported loan functionality

Dynamic mortgages do not support the following features:

• Funding sources
• Penalties
• Late fees and planned fees
• Fee amortization
• Negative interest rates
• Negative interest spread
• Securities
• Taxes on interest, fees