Mortgage Repayments calculation

parkman2010

Hi,
Can someone help me please?
I have a 25 year mortgage of €180,000 at a variable rate of 3.25%.
According to my online account information I am currently paying approximately €885 per month. However every three months the mortgage company charges approximately €1395 in interest charge as well! Is this correct? According to my calculations the 885 is including interest, therfore why am I paying an extra 1395? Unfortunately I am not very good at figures and financial stuff:o!

Is this right and what is the interest charge for?

Thanks in advance,
Parkman

coylemj

First to look at the mechanics of loan accounts. Banks typically only add interest to your account every so often (in your case every three months) and add it on to the balance. In fact most of them calculate interest on a daily basis but you only see it when they add it to your balance, otherwise your statement would be unreadable.

If the account was reduced by just your monthly payment and no other numbers were applied to it, you would effectively be paying no interest, the bank adds the interest on to the balance every three months and this is perfectly normal.

If you pay the bank 885 per month and they never added on interest, you'd have the mortgage paid off in 17 years - multiply 885 by 12 by 17 and you get 180,540, the numbers have been calculated based on interest being added on an ongoing basis which as I said is perfectly normal practice.

3.25% APR converts to an interest bill of 1,445 per quarter on an outstanding balance of 180,000. As you are probably paying based on a reducing balance, the bank slapping on 1,395 doesn't look out of the ordinary and suggests that you're in the early part of the mortgage, this amount (quarterly interest) will reduce over time.

A quarterly interest bill of 1,395 at a rate of 3.25% APR suggests an outstanding balance of 173,771.

homer911

Yes, the 885 includes interest, but the 180,000 doesnt

Ogham

By may calculation - your repayments on a 180,000 mortgage at 3.25% over 25 years should be 877 a month. I don't know where they are getting this extra 1395 every 3 months.
With a repayment mortgage - the repayments are calculated to be fixed for the whole of the mortgage (assuming rates remain the same).

Have you not queried it ? How long has this been going on ?

coylemj

Ogham wrote: »

By may calculation - your repayments on a 180,000 mortgage at 3.25% over 25 years should be 877 a month. I don't know where they are getting this extra 1395 every 3 months.

That's just 8 euros per month difference over 25 years. The 1,395 per quarter is the interest - read the numbers in my post. If 1,395 wasn't added every three months the loan would be paid off over 17 instead of 25 years - there is no 'extra' 1,395 every three months.

Ogham wrote: »

With a repayment mortgage - the repayments are calculated to be fixed for the whole of the mortgage (assuming rates remain the same).

No they're not, there is no such thing as a 25-year fixed rate mortgage unless you're paying an outrageously inflated fixed rate, please get real. When you say 'assuming rates remain the same' would you care to quote a recent 25-year period when interest rates didn't change?

Ogham

colemj - I don't know where you are getting your figures from.

A 3.25% rate on 180,000 on a standard repayment mortage over 25 years (capital and interest) will result in monthly repayments of 877.17

Total paid after 25 years - 263,151
Capital 180,000 , Interest 83,151

I have never heard of mortages repaid in the way you describe - which lender is it with parkman2010?

coylemj

Ogham wrote: »

With a repayment mortgage - the repayments are calculated to be fixed for the whole of the mortgage (assuming rates remain the same).

I'm not arguing over the exact monthly repayment, I'd actually say it should be 870.77. What I'd really take you up on is that statement above, nobody signs up for a fixed rate mortgage over 25 years.

With a capital and interest repayment mortgage, interest appears as a line item in your statement from time to time. As I said in an earlier post if the OP didn't see the interest getting added on he would have the loan paid back in 17 years, I really find it difficult that you can't grasp this, haven't you ever had a mortgage or term loan and seen the interest appear in the statement?

Ogham

coylemj wrote: »

I'm not arguing over the exact monthly repayment, I'd actually say it should be 870.77. What I'd really take you up on is that statement above, nobody signs up for a fixed rate mortgage over 25 years.

I was just trying to say that on a 3.25% variable - the current repayments should be 877 - and that IF that rate stayed the same - the payments would stay the same. (I know that won't happen - but just mentioned it)

You say you are not arguing over the amount they should be paying - but that is the main part of the argument.
You say that it should be 885 a month plus 1395 a quarter - i.e approx 1350 a month in total.
I say it should be just 877 approx a month .

I have had a mortgage (in the UK) - and usually saw a breakdown each year on statements of total capital an interest paid. I was never billed interest and capital separately.
I find it difficult too to understand why you seem so sure you are right.

Just enter the OP's figures into any of the banks morgage calculators and see what you get - it will be much closer to 877 than 1350 on a rate of 3.25%

See http://www.aib.ie/personal/mortgages/Owner-Occupier-Mortgage

http://www.ulsterbank.ie/roi/personal/borrowing/mortgages/calculators/repayment.ashx

http://personalbanking.bankofireland.com/mortgages/mortgage-calculators/repayment-calculator/

OP needs to get on to the lender and see why they are charging extra - or maybe OP has rates wrong?

coylemj

Ogham wrote: »

You say that it should be 885 a month plus 1395 a quarter - i.e approx 1350 a month in total.
I say it should be just 877 approx a month .

You still don't get it. The OP is paying 885 per month, this is deducted from the loan balance and if the interest rate doesn't change this amount per month will pay off the loan in 25 years.

The quarterly interest that he sees on his statement is not in addition to the agreed monthly payment, you are dividing the quarterly interest by three and adding it on to his monthly payment which is incorrect, the monthly payment includes interest.

Every day the bank calculates the interest on the outstanding balance and once every three months this interest is added on to the balance on his statement. If they didn't do this the loan would be paid off in 17 years, not 25 because without the 1,395 interest being levied every quarter he would effectively have an interest-free loan.

Ogham

Well that makes a bit more sense now
The OP stated they were paying that extra amount on top of the monthly payments - which is what I was saying was wrong. But - now I see that they are not actually being asked to pay that.

Sorted (hopefully parkman2010)

parkman2010

Hi Guys,
Thanks for the help.
The situation is that my account says that I am paying almost €885 per month off my mortgage. Every three months the bank adds €1395 in interest to the overall balance. I understand more now thanks to your posts. I can see that after 17 years it would be paid at that rate. I presumed that as it was for 25 years the payments would continue for the further 8 years and that would result in a total payment of €265,500, including interest of €85,500. I never had a loan of any type in my life so hadn't a clue!!

coylemj

Remember that 885 p.m. will pay off the loan in 25 years but if it's a variable rate there's nothing to stop you paying extra, either by increasing your monthly payment or lodging the odd lump sum to the account and this will shorten the life of the loan.

parkman2010

Thats great thanks for all your help.
I'l be wiser in the future!!