Jump to content
House Price Crash Forum
Sign in to follow this  
fadeaway

Stupid Question About Mortgages

Recommended Posts

Hello everyone.

Something I noticed while crunching some numbers.

If I take out a mortgage of £100,000 over 10 years at 5% : I will pay about £1060 a month for 240 months. (£127,200)

If after 3 years and (36*£1060 = £38,160 spent) I decide to switch mortgage provider, I will still owe £70,000 on the mortgage.

My new mortgage is £70,000 over 7 years at 5%. I will now pay £990 a month for 84 months. (£83,100)

The amount paid in these two 3 and 7 year periods would be £38,160 + £83,100 = £121,260.

Does this mean that by remortgaging as often as possible you can reduce the amount paid in total?

My reasoning for this is that the interest on 100k over 10 years was more than the interest on 100 over 3 years plus the interest on 70k over 7 years (obviously).

You could extend this further by remortgaging even more often: The interest on 100k over 10 years is more than the interest on 100k over 3 years, 70k over 3 years and 40k over 4 years.

Is this theory correct or would the first example actually be interest on 100k for the first year, interest on 90k for the next year... and so on?

Share this post


Link to post
Share on other sites

I'll leave the exact number crunching to others, but looks to me like your figures are very wrong.

After 3 years of paying the mortgage, you'll not have reduced it from 100K to 70K. Most of the payments you make go directly to servicing the interest due on the debt. More likely after 3 years you'll have reduced it from 100K to 95K. As you pay down the debt, more of your repayments go into paying off the original sum rather than the interest so you gradually start to pay off the original sum faster and faster.

Share this post


Link to post
Share on other sites

If after 3 years and (36*£1060 = £38,160 spent) I decide to switch mortgage provider, I will still owe £70,000 on the mortgage.

Actually, after 3 years you will owe more like £75,000 rather than £70,000. The amount paid off the balance (the "amortization") starts off being very low and ramps up towards the end of the term.

See here:

Year         Balance         Yearly Interest         Principal Paid      Total Interest  2010      92,092.56      4,820.42      7,907.44      4,820.42    2011      83,780.56      4,415.86      8,312.00      9,236.28    2012      75,043.30      3,990.60      8,737.26      13,226.88    2013      65,859.02      3,543.59      9,184.27      16,770.47    2014      56,204.87      3,073.70      9,654.16      19,844.18    2015      46,056.78      2,579.78      10,148.08      22,423.95    2016      35,389.50      2,060.58      10,667.28      24,484.54    2017      24,176.47      1,514.82      11,213.04      25,999.36    2018      12,389.75      941.14   11,786.72   26,940.51    2019      0.00      338.11      12,389.75      27,278.62   

Share this post


Link to post
Share on other sites

A mortgage is not like a car loan where the interest and capital are paid off at the same rate. The interest payments are front-loaded, so in the early years you are paying more interest and less of the capital.

Using this calculator: http://www.moneysavingexpert.com/mortgages/mortgage-calculator

After 3 years you still have £75,043.30 left to pay.

Paying that off over another 7 years gives payments of £1060.66 (same as before).

So you would pay off the same overall amount. BUT you lose out on application fees to switch, survey for re-mortgage, possibly any lock-in penalties etc.

Share this post


Link to post
Share on other sites

Hello everyone.

Something I noticed while crunching some numbers.

If I take out a mortgage of £100,000 over 10 years at 5% : I will pay about £1060 a month for 240 months. (£127,200)

If after 3 years and (36*£1060 = £38,160 spent) I decide to switch mortgage provider, I will still owe £70,000 on the mortgage.

My new mortgage is £70,000 over 7 years at 5%. I will now pay £990 a month for 84 months. (£83,100)

The amount paid in these two 3 and 7 year periods would be £38,160 + £83,100 = £121,260.

Does this mean that by remortgaging as often as possible you can reduce the amount paid in total?

My reasoning for this is that the interest on 100k over 10 years was more than the interest on 100 over 3 years plus the interest on 70k over 7 years (obviously).

You could extend this further by remortgaging even more often: The interest on 100k over 10 years is more than the interest on 100k over 3 years, 70k over 3 years and 40k over 4 years.

Is this theory correct or would the first example actually be interest on 100k for the first year, interest on 90k for the next year... and so on?

The way a repayment mortgage works is that you pay only some of the capital off during the early years, and a lot of interest, but in later years, you pay less interest and more capital.

So if you think that you have paid of 30% of you capital, after 30% of the time, you are wrong.

Try looking at a mortgage calculator. http://www.drcalculator.com/mortgage/

Share this post


Link to post
Share on other sites

So if you think that you have paid of 30% of you capital, after 30% of the time, you are wrong.

Looks like that is a major part of where I am going wrong, thanks for the responses everyone.

So if you pay lots of interest first and then as the capital owed decreases the interest decreases, meaning the capital is paid off quicker - wouldn't that mean each time you get a new mortgage you start paying lots of interest early which is a bad thing?

Share this post


Link to post
Share on other sites

Nevermind, it all just clicked after spending some time with http://www.drcalculator.com/mortgage/

I pay more interest and less capital to begin with because of the large amount borrowed, it doesn't matter if I stay with one provider for 10 years or switch every 2 years - the amount of interest being paid is decreasing because the capital is being repaid, not because they're frontloading the interest.

Yeah I understand a lot more now, thanks (:

Share this post


Link to post
Share on other sites

Just got off the phone with a lloyds representative and discovered that, with my 20k deposit, borrowing 170k over 25 years means I end up paying them 328k. I'm a little shocked that I would end up paying nearly 3x the amount I borrowed.

Does this sound right?

Going to get on to Jon Carcol (sp?) in the morning and see what they can offer. That sounds like rather a lot of money if you ask me...but then I am a ftb noob.

Criticise me!

Share this post


Link to post
Share on other sites

Just got off the phone with a lloyds representative and discovered that, with my 20k deposit, borrowing 170k over 25 years means I end up paying them 328k. I'm a little shocked that I would end up paying nearly 3x the amount I borrowed.

Does this sound right?

Going to get on to Jon Carcol (sp?) in the morning and see what they can offer. That sounds like rather a lot of money if you ask me...but then I am a ftb noob.

Criticise me!

Yes, it sounds correct....and what's more it will probably be a lot more unless you make overpayments because this has been calculated on a current all time low of interest rates. I doubt that you'd go 25 years without higher interest rate periods.

Share this post


Link to post
Share on other sites

Just got off the phone with a lloyds representative and discovered that, with my 20k deposit, borrowing 170k over 25 years means I end up paying them 328k. I'm a little shocked that I would end up paying nearly 3x the amount I borrowed.

Does this sound right?

Going to get on to Jon Carcol (sp?) in the morning and see what they can offer. That sounds like rather a lot of money if you ask me...but then I am a ftb noob.

Criticise me!

I believe £328k is less than 2 times £170k , not 3 times ;).

You can build your own mortgage calculator in excel, this linkexplains how to do it. When you work out your monthly mortgage payment multiply it by the number of months you'll be paying it off (300 for a 25 year term) and that will give you the total amount you will have to pay back. That's assuming that interest rates stay the same for 25 years which I believe they won't. I'm in a similar position and I'm factoring in 8-10% mortgage rates for when my fixed rate deal ends in 5 years.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 145 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.