Mortgage Repayment Question

TristanPeter

Hi All,

There's something I'm a bit unsure of about my mortgage repayments and hopefully you might be able to shed some light on it.

Anyway; I have been paying my mortgage off for the last 8 years but I have been noticing that even though the capital has been decreasing the repayments have not, give or take around €10 per year. Based on my basic knowledge of compound interest etc. I was always under the impression that as the capital reduces the interest should reduce in line with it because I am no longer paying off interest on the same amount of capital...because it's decreasing with each installment. When I spoke to my lender about this they said the repayments have not decreased because they want to try to keep the repayments the same to help the borrower They said that with each monthly payment the capital amount paid off increases whereas the interest amount decreases. Okay, that seems alright but should the payment overall not decrease seeing as the capital is being paid off?

For argument's sake let's say I pay off €800 in month 1. €150 of this is interest. They are saying that in month 2 I then pay off the same amount €800 but now I'm paying €670 off the capital and only €130 in interest.

Is this correct? I'm confused I must admit because I always thought that over the years the repayments decrease because the interest relative to capital owed decreases.

I hope this doesn't call for a face-palm

tHE vAGGABOND

early on in a mortgage you are paying off next to nothing off the principal - its loaded so the bank get most of their money [the interest] up front.

TristanPeter

I understand that but will the overall installment amount eventually decrease over time?

liger

TristanPeter wrote: »

I hope this doesn't call for a face-palm

The mortgage repayments only really change if your on a variable and rates change. if they go down that means you owe less and your repayment go down.

The bank has worked out that your sum borrowed + interest can be repayed over the full term you picked with those monthly payments.

Unless you mean your making overpayments??? in that case the term of the mortgage could be shorten.

seamus

TristanPeter wrote: »

I understand that but will the overall installment amount eventually decrease over time?

No. The repayment amount is usually static (interest rates notwithstanding) for the life of the mortgage.

It's effectively your capital owed + interest payable (over the life of the mortgage) divided by the number of months remaining on the mortgage.

Kosseegan

What happens is that you borrow a sum of money. You agree to pay it back at a rate of interest over a term. Say it is 100k over 10 years at 5 %. Interest is charged on the sum outstanding every three months. A level of repayment is calculated which will result in the entire amount being paid back by even 120 even instalments. Each monthly instalment will therefore have a progressively greater capital repayment than the previous. In the first month the sum outstanding is at its max so on the example given above interest of €400 would be payable. By the final instalment there would be little capital outstanding and only a few euro of an inetrest charge.
The only way you would have a reducing payment each month is if it was agreed that you would pay a fixed amount off the capital plus the accrued interest each month. Most people would not want that beacuse it would mean heavier monthly payments at the start.

TristanPeter

I knew that face palm was on the way...just lurking behind a dark corner waiting to pounce

Thanks for clarifying the issue everyone. I confused myself by over-thinking about it.

Are over-payments a good idea in the long term (relative to interest charges on the capital owed) if there is money to spare or do you think it's better to just keep the regular payments up?

Kosseegan

TristanPeter wrote: »

Are over-payments a good idea in the long term (relative to interest charges on the capital owed) if there is money to spare or do you think it's better to just keep the regular payments up?

There can be a considerable saving of interest if capital is repaid early. Small additional amounts paid off early in the loan can shorten the term dramatically. The disadvantage is that the money might have been held as savings attracting interest and is much less accessible when paid against the mortgage. At the moment it is difficult to re mortgage so a lot of equity in a house is of much less immediate use than a svaings account.
Some people cant save money for any length of time and paying off the mortgage early soaks up cash they might have wasted.

Posy

Can you do overpayments, say, every month or could you go to your bank and pay 10k off your mortgage in a lump sum, for example?

How much, in general, do people end up paying back to the bank altogether?
Say I got a mortgage of €150,000- what would the estimate be for how much, after 20+ years, I'd have actually paid them?

pancakes rule

This is a mortgage calculator which explains it all