Building Loans (Jersey) Law 1950: New Method of Interest Calculation

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A decision made 26 February 2018:

Decision Reference: MD-H-2018-0006
Decision Summary Title:	Building Loans (Jersey) Law 1950 amended – introduction of new interest calculation methodology		Date of Decision Summary:	20th February 2018
Decision Summary Author:	Fund Accountant, Treasury and Investment Management		Decision Summary: Public or Exempt?	Public
Type of Report:	Written		Person Giving Oral Report:	n/a
Written Report Title:	Building Loans (Jersey) Law 1950 amended – introduction of new interest calculation methodology		Date of Written Report:	20th February 2018
Written Report Author:	Fund Accountant, Treasury and Investment Management		Written Report: Public or Exempt?	Public
Subject: Building Loans (Jersey) Law 1950 amended – introduction of new interest calculation methodology
Decision(s): The Minister approved a new interest calculation methodology for loans under the Building Loans (Jersey) Law 1950 amended.
Reason(s) for Decision: The Building Loans (Amendment No. 13) (Jersey) Law 2018 was registered by the Royal Court on 16th February 2018. The amendment has closed the inconsistency between the principle law and regulations by giving the Minister for Housing power to amend the interest payment methodology for loans. Previously the Law required a rigid method of calculating interest payments on the loans based on the balance of the loan on the 1st January each year. This was inconsistent with modern practice where the method of calculating interest on the loans is to apply a reducing balance based on the rolling monthly capital value of a loan over its lifetime.
Resource Implications: There will a small reduction in the level of interest income generated as a result of different calculation based on reduced balance of the loan instead of balance at the beginning of each year. This will not have a material effect on the loan fund.
Action required: Fund Accountant, Treasury and Investment Management, to action changes required as a result of change in interest calculation method, and to communicate the changes to loan holders.
Signature:		Position: Deputy Anne Pryke Minister for Housing
Date Signed:		Date of Decision (If different from Date Signed):

Building Loans (Jersey) Law 1950: New Method of Interest Calculation

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Minister for Housing

Ministerial Decision Report

Building Loans (Jersey) Law 1950 amended – introduction of new interest calculation methodology

Purpose of Report

To approve the new interest calculation methodology.

Background

The administration of the States loans had been outsourced to external loan administrator since September 2001 but during the course of 2016/2017 steps have been taken to centralise certain aspects of loan administration under Treasury.

During this review the current method of interest calculation applied to many loans has been identified as an antiquated methodology, not in line with commercial practice.

Furthermore the inconsistency between the law and regulations was identified, so steps were taken to amend the Building Loans (Jersey) Law. The proposal was adopted on 31st of October 2017. This will give the power to the Housing Minister to amend the interest payment methodology. Now steps can be taken to modernise the calculation methodology.

Currently loans charge interest based on an ‘annual charge’ method. Interest is calculated on the opening balance of the loan and spread evenly over the year.

The most common commercial method for calculation of loan interest is to apply interest to the rolling monthly capital value of a loan over its life. Capital payments are calculated so the total payments remain unchanged over the life of the loan. This would equate to an APR (Annual Percentage Rate) roughly equivalent to the headline rate.

As a part of loan centralization at the Treasury the decision was also taken to implement the Treasury Loans Management System to more effectively manage the States Loan Portfolio. The implementation is planned for as soon as the Law has been approved by Privy Council as the new system is in line with the new interest calculation methodology.

Recommendation

The Minister for Housing is recommended to approve the new interest calculation methodology.

Reason for Decision

The Building Loans (Jersey) Law amendment has closed inconsistency between law and regulations and has given the Minister for Housing power to amend the interest payment methodology. Previously the Law required a rigid method of calculating interest payments on the loans based on the balance of the loan on the 1st January each year. This was inconsistent with modern practice where the method of calculating interest on the loans is to apply a reducing balance based on the rolling monthly capital value of a loan over its lifetime.

5. Resource Implications

There will a small reduction in the level of interest income generated as a result of different calculation based on reduced balance of the loan instead of balance at the beginning of each year. This will not have a material effect on the loan fund