Interest On Mortgage

pavb2

Hi all I had mortgage statement through today I re mortgaged over 25 years 2 years ago.

So last year balance was €336k this year I have paid €12K off capital sum & €9K interest.

(Payments between €1600 & €2000 per month depending) on interest rates

Even at this total interest payments will be over €210K for mortgage term does this seem right & is it true that interest rates are high for first 10 years of mortgage?

Thanks for any help

penexpers

Sounds about right and yes for the first few years you are paying mostly interest and a little capital.

Check out the mortgage calculator here for figures http://www.drcalculator.com/mortgage/

seamus

Interest rates are uniform throughout the term of the loan - that is, they're not intentionally higher or lower at any period of the loan except due to market forces.

However, the interest payable is front-loaded, so you don't pay off the same amount of interest every month. You pay more interest at the start of the loan than at the end.

Simple example:

You have a mortgage of €300k over 300 months (25 years). In total, you end up paying €150k in interest. This means that in total, you have to repay €450k over 300 months, or €1,500 per month.

Now, if the loan is one-third interest, you would expect that each loan repayment represents two-thirds equity (€1,000) and one-third interest (€500), right? Wrong

The bank structures it in such a way that (for example) for the first ten years, two-thirds of your monthly repayment are interest, and one-third is equity.

The result is that by the time you are halfway through your 25-year mortgage term, you'll have paid the bank back about 75% of the interest on the mortgage. If you then sell, the bank get their equity back and they've recouped 25% more interest than they would have if the repayments were evenly structured.

The mortgage calculator provided above is a fantastic way of looking at your mortgage from a different point of view.

There are two very simple things you can do with your mortgage to make it shorter and pay off your equity quicker:

1. Switch to two-weekly repayments instead of monthly. Most lenders off this facility as a leg-up for "struggling" households but in reality it's the option for people with more flexibility in their cash. You will end up with more mortgage repayments per year (12.5 - 13, as opposed to 12), you will also reduce the term of your mortgage by about 10%.

2. Put lump sums against your mortgage, early and often. You will *never* get an interest rate for a savings account that's higher than the interest rate for your mortgage. For example, if you have €5k and you stick it into a savings account @ 3% p.a., you will make an extra €1,650 after ten years.
But if you throw it against your mortgage @ 4%, you will save €2,450 in interest.
Obviously play the market on this. If you can find a short-medium term savings account with better returns than your mortgage, use that.

penexpers

seamus wrote: »

You will *never* get an interest rate for a savings account that's higher than the interest rate for your mortgage.

Well, at the moment, this statement is not true for those on low margin trackers. I'm on ECB+0.75% (1.75%). All of the AIB savings products (for example) offer more than 2.25%.

seamus

penexpers wrote: »

Well, at the moment, this statement is not true for those on low margin trackers. I'm on ECB+0.75% (1.75%). All of the AIB savings products (for example) offer more than 2.25%.

Indeed, never is probably too strong a word. Sometimes you will get lucky, such as those of us still on trackers, but in general the interest rates offered on new mortgages will always be higher than the interest rates on new savings accounts.

Anne2010

seamus wrote: »

I

1. Switch to two-weekly repayments instead of monthly. Most lenders off this facility as a leg-up for "struggling" households but in reality it's the option for people with more flexibility in their cash. You will end up with more mortgage repayments per year (12.5 - 13, as opposed to 12), you will also reduce the term of your mortgage by about 10%.

Seamus, I have been making weekly payments towards my mortgage instead of monthly (AIB bank) for the last 4 years (I switched from monthly to weekly after 1 year from the start of the mortgage), assuming that my mortgage term will be reduced by a number of years. However recently I found out that AIB bank has been collecting these weekly payments, 'sitting' on them and only applying them to my mortgage account quarterly! Four times a year! I looked through my mortgage documents and apparently thats what I signed for! I find it absolutely ridiculous - even If I was making standard monthly payments, they would still not be going into my mortgage account immediately. So many people don't realize that if their monthly payments were applied to their mortgage accounts immediately, that one thing alone would shorten their mortgage term by at least a couple of years!!! I feel totally ripped of... If only I knew what I was signing for.. Has anyone got any advice at all?

NewDirection

seamus wrote: »

Interest rates are uniform throughout the term of the loan - that is, they're not intentionally higher or lower at any period of the loan except due to market forces.

However, the interest payable is front-loaded, so you don't pay off the same amount of interest every month. You pay more interest at the start of the loan than at the end.

Simple example:

You have a mortgage of €300k over 300 months (25 years). In total, you end up paying €150k in interest. This means that in total, you have to repay €450k over 300 months, or €1,500 per month.

Now, if the loan is one-third interest, you would expect that each loan repayment represents two-thirds equity (€1,000) and one-third interest (€500), right? Wrong

Correct up to here.

seamus wrote: »

The bank structures it in such a way that (for example) for the first ten years, two-thirds of your monthly repayment are interest, and one-third is equity.

The result is that by the time you are halfway through your 25-year mortgage term, you'll have paid the bank back about 75% of the interest on the mortgage. If you then sell, the bank get their equity back and they've recouped 25% more interest than they would have if the repayments were evenly structured.

Not so much here. The bank don't decide to frontload it like you've explained. Its just basic maths that frontloads it.

YEAR 1
In your example above, presume the rate is 3.5%, the interest for year one will be roughly. 3.5% of 300,000 or €10500 for year 1.
Or roughly €10500/ 12 = €875 a month

If your paying €1500 repayments that means every repayment you make is taking €625 off the principle.

YEAR 2
So you've paid roughly €625 * 12 off the principle in year 1 leaving you with a mortgage of €292,500.
So interest payments in year two are €292,500 * 3% = €8775
Or roughly €8775/12 = €731 a month

If your still paying €1500 this mean in year two each repayment is going to be taking €769 off the principle.

This should show you why you are paying so much interest in the first few years, and why it reduces every year.

*the roughlys are put in because the banks charge interest more regularly than once a year, so figures will be slightly different.
For correct figures try the calculator linked above.

seamus wrote: »

The mortgage calculator provided above is a fantastic way of looking at your mortgage from a different point of view.

amen

Even at this total interest payments will be over €210K for mortgage

if you look at the mortage documents you signed there is a page detailgin how much you will pay back in total over the term of the mortage

generally the longer the term the more you pay back

seamus

Anne2010 wrote: »

Seamus, I have been making weekly payments towards my mortgage instead of monthly (AIB bank) for the last 4 years (I switched from monthly to weekly after 1 year from the start of the mortgage), assuming that my mortgage term will be reduced by a number of years. However recently I found out that AIB bank has been collecting these weekly payments, 'sitting' on them and only applying them to my mortgage account quarterly! Four times a year! I looked through my mortgage documents and apparently thats what I signed for!

That's a little bit mental, I've never heard anything like that before. The problem here is that your mortgage interest is probably calculated on a monthly basis, so you're actually paying *more* interest over the length of the mortgage than if you just had normal monthly repayments.

Having done the figures, if they apply the interest quarterly (with your repayments), you're paying about €400/year extra in interest. If they apply the interest monthly, you're paying €500 more than you need to.

Do they do anything with the weekly payments while they're being held - i.e. do they going into some savings accounts to accrue interest?

If only I knew what I was signing for.. Has anyone got any advice at all?

Can you change it?

Anne2010

Hi Seamus, I was wondering if you could answer this question:
Will this reduce the term of my mortgage? The bank said it wont. I think they are wrong.
I have been making weekly payments (instead of monthly) towards my mortgage for the last few years.
The bank just confirmed that each weekly repayment reduces the outstanding balance of my loan accordingly, on a weekly basis. The interest is calculated on a daily outstanding balance of my loan and is debited to my mortgage account quarterly in arrears (every three months). Will my weekly repayments (rather than monthly) reduce the term of my loan? I think that in long term it should make a difference?