interest amounts on 20 or 25 year mortgage

DamoKen

Hi, I'm trying to decide which in the long term would be more value for money where mortgage interest is concerned taking into consideration that for the first number of years you will be paying a lot more on the interest than capital.

Figures below are just for example, i.e. not based on any rates.

So I take out a mortgage of 300,000.

Over a 25 year term the total interest on the mortgage is 150,000.

Over a 20 year term the total interest is 100,000.

Obviously the monthly repayments increase making it tougher to pay but still doable.

Now say I know within a couple of years I will be able to pay off a lump sum of for example 100,000.

Given the interest payments on a mortgage are front loaded which in this case would be the better option?

i.e. after the adjustment of the additional cash has been made against the interest owed, would I still have a significantly higher amount of interest outstanding?

Not sure how I would calculate this so if anyone knows of a formula I could use I would really appreciate it. We are thinking of moving soon and this is something I want to get straight in my head before making any decisions on mortgage terms.

Thanks!

tomfoolery60

DamoKen wrote: »

Hi, I'm trying to decide which in the long term would be more value for money where mortgage interest is concerned taking into consideration that for the first number of years you will be paying a lot more on the interest than capital.

Figures below are just for example, i.e. not based on any rates.

So I take out a mortgage of 300,000.

Over a 25 year term the total interest on the mortgage is 150,000.

Over a 20 year term the total interest is 100,000.

Obviously the monthly repayments increase making it tougher to pay but still doable.

Now say I know within a couple of years I will be able to pay off a lump sum of for example 100,000.

Given the interest payments on a mortgage are front loaded which in this case would be the better option?

i.e. after the adjustment of the additional cash has been made against the interest owed, would I still have a significantly higher amount of interest outstanding?

Not sure how I would calculate this so if anyone knows of a formula I could use I would really appreciate it. We are thinking of moving soon and this is something I want to get straight in my head before making any decisions on mortgage terms.

Thanks!

Could you overpay the 25 year mortgage every month instead? That way you keep the flexibility

PhoenixParker

Try this yoke - https://www.drcalculator.com/mortgage/ie/

It's great for playing around with stuff like this.

Mezcita

You also need to make sure that type of mortgage you take out allows overpayments. Some fixed rate mortgages might have it capped at a set amount per month.

The_Conductor

DamoKen wrote: »

Given the interest payments on a mortgage are front loaded which in this case would be the better option?

Mortgage payments are not 'front loaded' as you put it- but based on the amount of principle outstanding. If you took out the loan over a 25 year period- but overpaid it at the outset- reducing the principle owed- and were in a position to knock a chunk off the principle down the road too- you might very well end up paying back less than on the 20 year mortgage- without knocking lumps off the principle- it all depends on how the mortgage is structured- and your ability to overpay early on.

DamoKen

Cheers for all the replies guys, and the link, I'll take a look at that tonight. Conductor where you say if we were to overpay from the outset on a 25 year mortgage and then maybe add a lump sum a few years in we might end up paying less interest than against a 20 year mortgage, is that only the case where we never put a lump sum against the 20 year mortage?

Thanks

The_Conductor

DamoKen wrote: »

Cheers for all the replies guys, and the link, I'll take a look at that tonight. Conductor where you say if we were to overpay from the outset on a 25 year mortgage and then maybe add a lump sum a few years in we might end up paying less interest than against a 20 year mortgage, is that only the case where we never put a lump sum against the 20 year mortage?

Thanks

No- it depends on the level of overpayments early on- aka- if you can knock a lump off the principle early in the equation- it has a multiplier effect later......

Easiest way of showing this- is to do an annuity table in excel and look at the effects of knocking a lump off the principle early on- versus a lumpsum later in the equation..........

Key to everything- is try to pay off principle as early as possible- after all thats what the interest is calculated on.........

uck51js9zml2yt

Conductor is making sense.
See it as having less of a principal amount to pay interest on.

If you reduce the principal early , you'll have less to pay interest on in the long term which will save you money.

DamoKen

Thanks guys, followed your advice Conductor and downloaded an annuity template, tried different options and see what you mean. Little to no difference on the interest amount between the 20 & 26 year term if we continually overpay. Main advantage I suppose of the longer term is it gives us a bit more flexibility over the first few years when money might be a bit tighter.

Thanks again, much clearer in my head now

DamoKen

Quick question. Downloaded this spreadsheet http://www.vertex42.com/Files/download2/excel.php?file=loan-amortization-schedule_L.xlsx and tried out various options.

One scenario I tried was to compare a mortgage of 300,000 over 25 years with a lump sum of 100,000 added in the 25th month against a mortgage where the lump sum is added against the amount borrowed, i.e. a mortgage of 200,000 over 25 years. Results were a bit surprising and seem to suggest it would be a lot more cost effective to borrow more and pay a lump sum against it early into the mortgage.

That is unless I'm reading the results incorrectly? On the spreadsheet I linked to

Option 1: Mortgage of 300,000 for 25 years @ 3.25 and 100,000 deposited in month 26. Total interest comes to €60,682.67

Option 2: Mortgage of 200,000 for 25 years @ 3.25 and no lump sum. Total interest comes to €92,390.11.

Not sure if this is correct, seems to suggest I'd save €32,000 over the lifetime of the mortgage to take the larger mortgage and add a lump sum early on. Am I reading this right or missing something obvious?

Cheers

PhoenixParker

DamoKen wrote: »

Quick question. Downloaded this spreadsheet http://www.vertex42.com/Files/download2/excel.php?file=loan-amortization-schedule_L.xlsx and tried out various options.

One scenario I tried was to compare a mortgage of 300,000 over 25 years with a lump sum of 100,000 added in the 25th month against a mortgage where the lump sum is added against the amount borrowed, i.e. a mortgage of 200,000 over 25 years. Results were a bit surprising and seem to suggest it would be a lot more cost effective to borrow more and pay a lump sum against it early into the mortgage.

That is unless I'm reading the results incorrectly? On the spreadsheet I linked to

Option 1: Mortgage of 300,000 for 25 years @ 3.25 and 100,000 deposited in month 26. Total interest comes to €60,682.67

Option 2: Mortgage of 200,000 for 25 years @ 3.25 and no lump sum. Total interest comes to €92,390.11.

Not sure if this is correct, seems to suggest I'd save €32,000 over the lifetime of the mortgage to take the larger mortgage and add a lump sum early on. Am I reading this right or missing something obvious?

Cheers

Yes because the payments you're making are very different.

300K you're paying 1,462pcm and you continue to pay that after the 100K lump sum, so the mortgage is in fact paid off in 14 years 11 months

200K you're paying 974pcm over the full 25 years.

If you take out the 200K and pay it off at 1462pcm your total interest will be E50,100

DamoKen

DamoKen wrote: »

Quick question. Downloaded this spreadsheet http://www.vertex42.com/Files/download2/excel.php?file=loan-amortization-schedule_L.xlsx and tried out various options.

One scenario I tried was to compare a mortgage of 300,000 over 25 years with a lump sum of 100,000 added in the 25th month against a mortgage where the lump sum is added against the amount borrowed, i.e. a mortgage of 200,000 over 25 years. Results were a bit surprising and seem to suggest it would be a lot more cost effective to borrow more and pay a lump sum against it early into the mortgage.

That is unless I'm reading the results incorrectly? On the spreadsheet I linked to

Option 1: Mortgage of 300,000 for 25 years @ 3.25 and 100,000 deposited in month 26. Total interest comes to €60,682.67

Option 2: Mortgage of 200,000 for 25 years @ 3.25 and no lump sum. Total interest comes to €92,390.11.

Not sure if this is correct, seems to suggest I'd save €32,000 over the lifetime of the mortgage to take the larger mortgage and add a lump sum early on. Am I reading this right or missing something obvious?

Cheers

Are you sure it is a mortgage repayment calculator and not an interest earned one?

DamoKen

PhoenixParker wrote: »

Yes because the payments you're making are very different.

300K you're paying 1,462pcm and you continue to pay that after the 100K lump sum, so the mortgage is in fact paid off in 14 years 11 months

200K you're paying 974pcm over the full 25 years.

If you take out the 200K and pay it off at 1462pcm your total interest will be E50,100

Knew I was missing something obvious. Upped the payments on 200,000 to match those on 300,000 and interest dropped accordingly.

Cheers

DamoKen

Deleted User wrote: »

Are you sure it is a mortgage repayment calculator and not an interest earned one?

Hi PG, it's a Loan Amortisation Schedule