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Liopik

How Banks Calculate Mortgage Interest?

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Hi all.

I'm currently paying a mortgage each month. In March I'd my interest lowered from 3.04% to 1.99. Before I was paying £575 a month, and after april I started to pay £516 a month. Then I decided that I can overpay each month and I increased my DD up to £816. But my question is, why am I paying the same interest (around £190) even after I increased my monthly payment? I suppose the purpose of overpaying is to lower the amount of interest I'm paying each month? Or am I wrong? Please, explain me this. Otherwise I don't know why I'm overpaying.

Please, have a look at the printscreen attached.

Thank you.

Screenshot_2015-10-01-08-28-35~2.jpg

post-36407-0-90585400-1443685582_thumb.jpg

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This may depend on when your mortgage provider recalculates your mortgage. It can be as much as yearly, though I was under the impression most lenders these days did it on a daily basis?

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Actually, if you look it is going down. There's some fluctuation in there because the months are of different lengths.

Going down? But its just couplenof quids. Its nothing. I was expecting some 50-100£ diference :)

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Going down? But its just couplenof quids. Its nothing. I was expecting some 50-100£ diference :)

do you have GCSE maths? If you do you should go back and ask for a refund.

This isn't correct but its close enough to illustrate th epoint

If your rate is 1.99% per year, you're paying APPROXIMATELY 0.166% of the outstanding balance in interest per month.

0.166% of £112,000 is £186 - close enough?

At the moment you are repaying £816 - £186 in capital = £630.

So next month your interest charge will drop by 0.166% of £630 which is £1.05

e

To drop your monthly interest charge by £50-£100 from your current arrangement you will need to repay APPROXIMATELY 25% - 50% of the capital you owe.

Edited by 25 year mortgage 8itch

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I see.

Thank you "25 year mortgage 8itch". Now I understand.

Am I right to say that the best way to save is to shorten the mortgage term and then overpay each month?

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I see.

Thank you "25 year mortgage 8itch". Now I understand.

Am I right to say that the best way to save is to shorten the mortgage term and then overpay each month?

That makes no difference from what you are doing . As it stands you have shortened the term automatically by making the overpayments - if you carried that on and the rate stays the same you'll pay it off 5-10 years early, I'd need the figures to work it out. download an app called (android) "Karl's Mortgage Calculator" there's a website by the same name too.

I think the answer you are looking for is different though. to decrease the term even further you need to make more money from saving than you do by over paying. Therefore you could invest your over payments some way to obtain a return of greater than the 1.99% you are paying on your outstanding balance. Don't forget about any taxes you might have to pay on those gains though.

arbitrage

Edited by 25 year mortgage 8itch

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Ok. So I will continue overpaying and will see how long that will take me to free myself from mortgage-jail. :)

Thank you very for explantions :)

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As mentioned above, it's worth establishing the basis on which your lender calculates interest - annually, monthly or daily.

Annually is worst for you (better for the lender), and daily is best for you. I don't know how much things have changed in the mortgage market in recent years, but even 15 years ago, many lenders were still using annual calculations.

With this information you can time overpayments to work best for you. For example, if interest is calculated annually, depending on mortgage/savings rates, it *might* be better to hold onto what you would otherwise overpay monthly, and then make one significant overpayment at the right time once a year. Best to check the T&Cs before changing what you currently do, as there might be limits on the frequency/amount of overpayments you can make without penalty.

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Im allowed to overpay mortgage by 10 percent. I intend to over pay a bit this year. Do we know when the monthly payments are recalculated. Of do you have request this? Do they send a yearly statement and the when it happens

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Im allowed to overpay mortgage by 10 percent. I intend to over pay a bit this year. Do we know when the monthly payments are recalculated. Of do you have request this? Do they send a yearly statement and the when it happens

Just ask them. If you want to overpay a lump sum do it as soon as possible in each mortgage year, and make sure you tell them whether you want it applied as an overpayment or part redemption (i.e. keeping monthly payments constant and lowering term, or recalculating your monthly payments lower to keep term constant).

Quite a good excel mortgage spreadsheet here: http://www.locostfireblade.co.uk/spreadsheet/Index.html

Edited by northshore

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If somebody is overpaying their mortgage and is ahead by say 12 months of regular payments, what happens if they hit financial difficulties?

iow, if you are a year ahead on payments, can you go a year of no payments without them seeing it as a default? If not, having the extra in a savings account seems safer.

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If somebody is overpaying their mortgage and is ahead by say 12 months of regular payments, what happens if they hit financial difficulties?

iow, if you are a year ahead on payments, can you go a year of no payments without them seeing it as a default? If not, having the extra in a savings account seems safer.

when i arrange my mortgage the mortgage advisor i asked him this question. He said they look more favorably on the people who are overpaid and the state does interest on your loan for a little while. He did ask what i would do if i this happned if i had payment protection insurance etc. I did say i would either sell up or move home with my mum for a bit and sell up.

One of the benefi cut mention was that state would still pay your interest but this would be now be loan and not given to you. I think this comes in 2017 but the clever people on forum might know better

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