When you take a mortgage, are your first months repayments just interest?

regi3457

If we get a 100000 mortgage and the monthly repayments are 500 euro, do those first monthly payments in the first few years count to the house at all or are you paying back interest really at the beginning?

godtabh

The majority is interest for a very long time. Only near the end will you be paying off more capital than interest

wench

Its largely interest, but some will be going off the principle - probably around a third at current interest rates.

You can plug your numbers in here, and then click the "monthly table" button to see how the payments break down
https://www.drcalculator.com/mortgage/ie/

Tigerandahalf

This is something that banks should be pulled up on. They seem to want to keep customers in the dark about what exactly they are paying back in terms of interest and principal.

There is an app in the play store called Karl's Mortgage Calculator which gives a full breakdown of what you pay in interest and principal each year and how paying off lump sums affects repayments. You need to check your bank's terms too.

I called into my local bank and asked for a breakdown and the guy was clueless about it.

thierry14

Correct your only really paying interest for the first 10 years or so if you take out 100k over 25 years at 4%

Your paying back the bank 58k for that 100k loan over 25 years

That's why people try and clear the loan as quick possible

amcalester

Tigerandahalf wrote: »

This is something that banks should be pulled up on. They seem to want to keep customers in the dark about what exactly they are paying back in terms of interest and principal.

There is an app in the play store called Karl's Mortgage Calculator which gives a full breakdown of what you pay in interest and principal each year and how paying off lump sums affects repayments. You need to check your bank's terms too.

I called into my local bank and asked for a breakdown and the guy was clueless about it.

Thats how loans work, that's what APR means.

Interest in calculated on the remaining balance of the loan, as the balance decreases so too does the interest portion. And as the monthly repayment is fixed as the interest portion decreases the capital portion increases.

Any loan agreement will clearly set out the cost of credit, that doesn't change just because the interest is "front loaded".

Not sure what the issue here is.

thierry14

amcalester wrote: »

Thats how loans work, that's what APR means.

Interest in calculated on the remaining balance of the loan, as the balance decreases so too does the interest portion. And as the monthly repayment is fixed as the interest portion decreases the capital portion increases.

Any loan agreement will clearly set out the cost of credit, that doesn't change just because the interest is "front loaded".

Not sure what the issue here is.

I think he means it shouldn't just be in the small print and should be a headline figure

290k mortgage you pay 540k total

4% interest is way too high imo for a long term loan

phormium

Everything counts but especially in the early years of a mortgage when the amount outstanding is at it's highest the interest added uses up the bulk of the repayments.

Let's take a simple roughly accurate figure to explain, 100k mortgage, interest rate 5%, term 30 yrs, repayments ?536.82 Now the interest is not added on all at once, it's normally calculated on the outstanding balance on a daily basis and applied monthly to the account but for simplicity I'm just using as an example that the interest is added on the day the mortgage starts. So say you draw down 100k on 1st January at 5% then your interest for the year is 5k (again this is not accurate as you do not get charged upfront on the balance for the year but easier to explain).

Right so now your balance is 105k (original 100k + 5k interest)

Your payments for the year are 526.82 x 12 = ?6,441.84

So at the end of the year your new balance is 105,000 less payments of 6441.84 = 98,558

So in year 2 your interest is calculated on the lower balance of 98,558 @ 5% = 4,927 so start balance for year is 98,558+4927=103,485 and you pay again 6,441 so you end that year 2 with balance outstanding of 103,485 less payments of 6,441 = 97,084 and so on into year 3 you are charged on 97,084.

Every year your balance goes down a little so the interest charged goes down a little and then at that stage the outstanding balance starts to reduce quicker. The repayments remain constant barring rate changes.

Again this is not exactly the way it happens as you don't get charged at the beginning of the year for the whole year. Instead usually on some date in the month interest for that month is added on after being calculated on the daily outstanding balance for that month. Then your payment comes in and reduces the outstanding balance so interest is calculated on that amount for the next month's interest charge and so on. In reality those figures I worked out would have a slightly lower interest charge than doing it the simple way I did based on the balance reducing very slightly each month.

There is just one rolling mortgage account made up of capital and interest, it goes up and down with interest added and payments made, they are not two separate amounts running so if you are continually paying a little more than the interest cost each month then the balance keeps reducing, slowly at first and then speeds up as the interest cost reduces due to the reducing balance in total.

And so ends today's finance lesson

myshirt

What?

There is nothing sinister going on here. That is what a loan is. You borrow money, and they charge you for it.

If anything the scandal is them charging 350 to 400 BPS when their cost of finance is well below that.

This raises a serious point. There is a shocking lack of financial literacy in this country. Amongst the many impacts at the front of my mind now is public sector pay. I'm not sure some people grasp how outrageous the situation is here, if they did they'd be hopping off the walls going nuts.

amcalester

thierry14 wrote: »

I think he means it shouldn't just be in the small print and should be a headline figure

290k mortgage you pay 540k total

4% interest is way too high imo for a long term loan

Well that's a very different discussion.

regi3457

wench wrote: »

Its largely interest, but some will be going off the principle - probably around a third at current interest rates.

You can plug your numbers in here, and then click the "monthly table" button to see how the payments break down
https://www.drcalculator.com/mortgage/ie/

thanks! So you reckon if the monthly repayments are 500 euro about 1/3 of that will go off the principle?

thanks will check out the table

SteM

regi3457 wrote: »

thanks! So you reckon if the monthly repayments are 500 euro about 1/3 of that will go off the principle?

thanks will check out the table

Remember, anything that you overpay will come directly from the principal cutting down the amount of interest you pay over the term. If you can afford it then overpay now.

Tigerandahalf

thierry14 wrote: »

I think he means it shouldn't just be in the small print and should be a headline figure

290k mortgage you pay 540k total

4% interest is way too high imo for a long term loan

That's the thing. They are not upfront on what you could end up paying. If interest rates go anywhere near that people would be paying crazy money.

Wage inflation isn't going anywhere to cover the rise in payments.

The difference between a 2% and 4% rate on total repayments is huge.

regi3457

thierry14 wrote: »

Correct your only really paying interest for the first 10 years or so if you take out 100k over 25 years at 4%

Your paying back the bank 58k for that 100k loan over 25 years

That's why people try and clear the loan as quick possible

Ok thanks. So I guess the important question I have is: Is it better to take a long-term loan (say 30 years) and pay extra into the loan to settle it quicker or is it better to take a shorter loan term like 10 years or even 5 years if you can afford it? Say you can afford to pay 1500 euro a month but your loan amount is only 500 euro over a 30 year period. Is it better to take out a 10 year loan or is it better to take out a 30 year loan and pay in the 1000 euro extra each month?

regi3457

SteM wrote: »

Remember, anything that you overpay will come directly from the principal cutting down the amount of interest you pay over the term. If you can afford it then overpay now.

Yes I read this somewhere. So is it better then to take out a 30 year loan and pay in extra? Wouldn't it be better just to take out a 10 year mortgage with higher installments?

Tigerandahalf

regi3457 wrote: »

Ok thanks. So I guess the important question I have is: Is it better to take a long-term loan (say 30 years) and pay extra into the loan to settle it quicker or is it better to take a shorter loan term like 10 years or even 5 years if you can afford it? Say you can afford to pay 1500 euro a month but your loan amount is only 500 euro over a 30 year period. Is it better to take out a 10 year loan or is it better to take out a 30 year loan and pay in the 1000 euro extra each month?

I would pay off as much as I could while interest rates are low. People putting extra money into pensions would be better off paying off more of their mortgage.

SteM

regi3457 wrote: »

Yes I read this somewhere. So is it better then to take out a 30 year loan and pay in extra? Wouldn't it be better just to take out a 10 year mortgage with higher installments?

No it wouldn't be better to take out a 30 year loan and pay in extra. The ideal scenario is to take out a 10 year loan and then overpay if you can afford it.

wench

regi3457 wrote: »

Ok thanks. So I guess the important question I have is: Is it better to take a long-term loan (say 30 years) and pay extra into the loan to settle it quicker or is it better to take a shorter loan term like 10 years or even 5 years if you can afford it? Say you can afford to pay 1500 euro a month but your loan amount is only 500 euro over a 30 year period. Is it better to take out a 10 year loan or is it better to take out a 30 year loan and pay in the 1000 euro extra each month?

If you keep to the same higher payment amount, there won't be much difference in the cost to you of taking the longer loan. I probably wouldn't push it all the way out to 30 though.
It does give you extra flexability to be able to reduce the payment to the lower amount if your circumstances change.
It would cost a bit more for mortgage protection insurance, but you can cancel it early when you've the loan repaid

regi3457

wench wrote: »

Its largely interest, but some will be going off the principle - probably around a third at current interest rates.

You can plug your numbers in here, and then click the "monthly table" button to see how the payments break down
https://www.drcalculator.com/mortgage/ie/

On the calculator, I see you left interest rate at 5? Is this the interest rate in Ireland?

phormium

Same thing, if you take out a 30 yr mortgage and pay what the repayments should have been on a 10 yr one it will end in 10 yrs regardless of what the original term says.

Only main difference is that you will need to take life cover for the 30yr term initially to satisfy the bank even if you intend paying it off in 10 yrs. But that can be a small enough cost for the flexibility of being able to reduce your payments to the 30yr ones should you ever need to. Overpay if you can but you won't have to.

Also bear in mind that affordability for a 10yr mortgage with the bank will be much higher than a 30yr one so you might not quality for a 10 yr term anyway. The original term is neither here nor there, it's what you can afford to pay over and above will shorten the term.

(Answers are coming in quick on this, several since I started typing my reply. Does this site not tell you there are more replies in case you want to review your reply? Or am I missing it somewhere?)

phormium

Definitely think some extra financial education is needed in this country, having spent years advising on stuff like this practically nobody knows how it works. It's basic maths stuff, do they not teach this anymore? There is nothing hidden about it, it's how any loan would work but no one seems to have ever learned it anywhere!

regi3457

SteM wrote: »

No it wouldn't be better to take out a 30 year loan and pay in extra. The ideal scenario is to take out a 10 year loan and then overpay if you can afford it.

The more ideal scenario is to buy the house outright!

wench

regi3457 wrote: »

On the calculator, I see you left interest rate at 5? Is this the interest rate in Ireland?

That rate is the default setting. Most banks are offering about 3.5 to 4% at the moment

SteM

SteM wrote: »

No it wouldn't be better to take out a 30 year loan and pay in extra. The ideal scenario is to take out a 10 year loan and then overpay if you can afford it.

Yes it would, its always better to take the maximum term even 35 years if you can get it and then overpay to what ever level you can. This means you can pay it off in say 8 years if you wish, cost you the same in interest as if you got an 8 year mortgage but you have the safety net of a very low repayment if you need to lower what you pay monthly for what ever reason which could be crucial a few years down the road.

Taking out a short term mortgage with high monthly repayments is very poor financial management.

dar100

My situation, took a 90,000 mortgage, 30 year, fixed for 5 years. Intetest 5.2% monthly repayment at 490. Over the term of the mortgage I will repay 170,000 however plan to overpay when fixed term ends. Feel like I got screwed as interest rates dropped about one month after took mortgage.

I get my interest quarterly and after 2/12 years it works out at about 4 payments per year going off principle

Bruthal

phormium wrote: »

Definitely think some extra financial education is needed in this country, having spent years advising on stuff like this practically nobody knows how it works. It's basic maths stuff, do they not teach this anymore? There is nothing hidden about it, it's how any loan would work but no one seems to have ever learned it anywhere!

Yes, it is very basic maths, its the same with paye stuff, yet most are totally clueless about it.

Samuel T. Cogley

My take has always been realise this OP but still go for the longest mortgage you can get with two provisos i) you can over pay without penalty ii) you get the best possible rate.

Along with the shock of how much interest you pay (especially as reference to the capital repayment in the first few years) it's amazing what a modest over-payment each month does to the term.

ThisRegard

thierry14 wrote: »

I think he means it shouldn't just be in the small print and should be a headline figure

290k mortgage you pay 540k total

4% interest is way too high imo for a long term loan

It's not in the small print, it's all upfront, as much as it can be when interest rates are variable.

AM258

Tigerandahalf wrote: »

There is an app in the play store called Karl's Mortgage Calculator which gives a full breakdown of what you pay in interest and principal each year and how paying off lump sums affects repayments. You need to check your bank's terms too.

Karl's calculator is brilliant, especially for working out the effects of overpaying or making lump sum payments. It's available online too - somebody already linked it above but here it is again. https://m.drcalculator.com/mortgage/

CeilingFly

Tigerandahalf wrote: »

This is something that banks should be pulled up on. They seem to want to keep customers in the dark about what exactly they are paying back in terms of interest and principal.

There is an app in the play store called Karl's Mortgage Calculator which gives a full breakdown of what you pay in interest and principal each year and how paying off lump sums affects repayments. You need to check your bank's terms too.

I called into my local bank and asked for a breakdown and the guy was clueless about it.

But some guy sitting behind a counter won't know the ins and outs of mortgage payments.

All banks give an annual statement and I know that both BOI and KBC breakdown each month's payment showing what amount is interest and what amount is off the principal.

I'm sure the other bank's do the same.

4ensic15

Samuel T. Cogley wrote: »

Along with the shock of how much interest you pay (especially as reference to the capital repayment in the first few years) it's amazing what a modest over-payment each month does to the term.

Can't see how it is that much of a shock. Add up how much rent you would pay for the use to the property over the life of the mortgage if you want a shock!

phormium

I'm sure the average cashier in the bank may not know the ins and outs (although they did years ago!) but the mortgage/loans advisor in any branch will know this stuff. Better to look for the relevant person for specific queries.

Jfrost

I can only recommend upping your payments if in a position to do so.
Better then any savings account.
Money you pay off, in its own way comes directly off the loan along with the interest you would have paid if you hadn't.
Had a 100,000 loan over 25 years, after year one the still owed 99,500 or similar...then upped payments and am rid of mortgage after 16 years.
Just in time to save for kids in college, eldest is Junior Cert.
There is always pressure, but secret is managing that pressure

bmwguy

Basically if you take out a 100k mortgage at 3.5% your balance at the end of year 1 would be 103500.

If you structure your loan that you pay back 3500 a year your balance will be 100k, I. E. the loan will never be cleared.

If you pay back 5k your interest payment will be 3.5k and your capital repayment will be 1.5k. Balance then will be 98.5k

If you pay back 10k your interest will be 3.5k and your capital repayment will be 6.5k. Balance will then be 93.5k

So to answer your question it really depends on the amount you want to pay back each month.

This is why a 20 year mortgage costs less than a 30 year mortgage overall.

4ensic15

bmwguy wrote: »

Basically if you take out a 100k mortgage at 3.5% your balance at the end of year 1 would be 103500.

If you structure your loan that you pay back 3500 a year your balance will be 100k, I. E. the loan will never be cleared.

That is not accurate. Interest is added every 3 months and is based on the average balance over the previous 3 months.
100k at 3.5 % with a repayment of 3,500 in the year will result in a monthly payment of approx €291.67. If 3 repayments are made and interest added on the average balance over the 3 months the balance would by €99969.66 at the end of year 1. It would take about 137 years to clear the loan at this rate. It would take about 117 years to get to the halfway point and about 20 after that to the end.

Samuel T. Cogley

4ensic15 wrote: »

Can't see how it is that much of a shock. Add up how much rent you would pay for the use to the property over the life of the mortgage if you want a shock!

Neither will many people yet, some people do...

...I don't know what a tracker mortgage is :pac:

Don't get me started on rent adjusted for inflation over 30+ years - even I know I'll attract the wrath of the OT warning there!