Advertisement
If you have a new account but are having problems posting or verifying your account, please email us on hello@boards.ie for help. Thanks :)
Hello all! Please ensure that you are posting a new thread or question in the appropriate forum. The Feedback forum is overwhelmed with questions that are having to be moved elsewhere. If you need help to verify your account contact hello@boards.ie
Interest On Mortgage
Options
-
22-02-2010 4:44pm#1
Comments
-
-
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.0 -
-
-
-
Advertisement
-
Correct up to here.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
Not so much here. The bank don't decide to frontload it like you've explained. Its just basic maths that frontloads it.
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.
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.
The mortgage calculator provided above is a fantastic way of looking at your mortgage from a different point of view.0 -
-
-
Advertisement