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Mortgage Calculations

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    #32
    Sniipe
    Registered Users Posts: 2,932 ✭✭✭Sniipe


    Wheety wrote: »
    https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx
    I like this - I see you can even add a date where you added an extra payment. However it doesn't cater for interest rate changes. I must try and create an excel sheet which can factor interest rate changes.
    It even gives a formula: M= P[r(1+r)^n/((1+r)^n)-1)]


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    #33
    TheChizler
    Registered Users Posts: 9,403 ✭✭✭TheChizler


    Sniipe wrote: »
    I like this - I see you can even add a date where you added an extra payment. However it doesn't cater for interest rate changes. I must try and create an excel sheet which can factor interest rate changes.
    It even gives a formula: M= P[r(1+r)^n/((1+r)^n)-1)]

    https://m.drcalculator.com/mortgage/


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    #34
    Sniipe
    Registered Users Posts: 2,932 ✭✭✭Sniipe


    TheChizler wrote: »
    https://m.drcalculator.com/mortgage/

    Thanks - I see the Int tab. I'm going to try this out and see how accurate the bank is.


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    #35
    Calahonda52
    Registered Users Posts: 12,193 ✭✭✭✭Calahonda52


    Just stumbled across this thread.
    Good to see a few self proclaimed John Nash-types here.
    My sense of the thread is that in the mortgage calculations, interest is compounded.

    While in the OP's case this may be the case
    I see it differently.
    and I am no John Nash

    https://www.ccpc.ie/consumers/money/mortgages/mortgage-interest-rates/
    Generally, the more often the interest on your mortgage is calculated, the less you will pay in interest.

    “I can’t pay my staff or mortgage with instagram likes”.



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    #36
    dotsman
    Registered Users Posts: 3,635 ✭✭✭dotsman


    Wheety wrote: »
    I thought interest was only paid on the balance? At first the interest is so high because the balance is at it's highest. But each month more will go off the capital and less to interest. At no point are you paying interest on interest.

    Apologies if I'm way off. Can anyone confirm?
    TheChizler wrote: »
    Interest won't be added to a balance, or compounded, unless you miss a payment right? Depending on the loan agreement.

    Sorry guys, but interest is, of course compounded. It has to be - it is on e of the basic principles of finance/lending otherwise, banks would effectively be giving you money for nothing. While different banks will do this differently, it is typically, for mortgages, calculated daily and applied quarterly (I made a mistake in my last post when I stated monthly). Not sure how other banks portray it, but for anybody with AIB, like I am, you will see interest being capitalised (i.e. added to the balance, and thus included for all daily interest calculations going forward) on the 16th of Mar, Jun, Sep & Dec.

    With regards online calculators/tables mentioned, they are oversimplifying what's happening in the background.

    As a side note, this is why you will typically see, in any credit agreement, that there may be a slight adjustment in your final payment, especially if you want to repay early and close off the loan. That is because they will need to manually apply all accrued interest since the last quarter and capitalise it to get the final balance.

    Just for those not familiar with the terminology:
    Calculated Daily - simple calculation to determine how much interest is owed on the balance as at the close of business on a given date.
    Accrued Interest - each day's interest is accrued (or gathered) and stored in a suspense account until the next capitalisation date.
    Capitalisation (or "Applying the Interest") - this were all the interest accrued is added to the balance (typically quarterly) to form a new balance.


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    #37
    TheChizler
    Registered Users Posts: 9,403 ✭✭✭TheChizler


    I don't know, my understanding is that it's set up so you're paying the interest as soon as it's due, that's why the interest to principal payment split is highest at the beginning of the mortgage and the ratio declines from then on. The bank add up all the interest charged on the principle every day for the month and present you with the bill at the end for convenience but don't add it to the principle in the interim and charge compound interest. Otherwise a graph of the interest you're charged would look like a sawtooth, rising everyday until you pay the bill and it resets back to the interest on outstanding principle only.

    Hopefully that's not what's happening to the op, and they're just displaying the sum of the interest charged for the last 2 weeks. Should be easy to calculate and cross check, the formulas are standard. I think (correct me if I'm wrong) that if the two values are equal that they're not compounding it, if they were the second value would be the first plus interest.

    The bank make money from interest on principle, not interest on interest unless you're in arrears.

    Found this in the ts and Cs for KBC. Only applies to arrears.
    Arrears
    Compound interest is charged on arrears of payments and will attract interest at the
    same rate applying to the loan advanced. To avoid paying such interest the arrears
    must be cleared in full.


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    #38
    Wheety
    Registered Users Posts: 5,510 ✭✭✭Wheety


    dotsman wrote: »
    Sorry guys, but interest is, of course compounded. It has to be - it is on e of the basic principles of finance/lending otherwise, banks would effectively be giving you money for nothing.

    They're not giving you money for nothing. They're charging interest.
    dotsman wrote: »
    While different banks will do this differently, it is typically, for mortgages, calculated daily and applied quarterly (I made a mistake in my last post when I stated monthly). Not sure how other banks portray it, but for anybody with AIB, like I am, you will see interest being capitalised (i.e. added to the balance, and thus included for all daily interest calculations going forward) on the 16th of Mar, Jun, Sep & Dec.

    With regards online calculators/tables mentioned, they are oversimplifying what's happening in the background.

    I checked my statement. My interest is never added to the principal.

    On a mortgage of €200k over 30 years at 3.6% the monthly payment is worked out at €909.29.

    At the end of the first month, the bank takes this amount and applies €600 of it to the interest from that month, the rest (€309.29) goes off the principal.

    €200,000 * 0.036 = €7,200 (Interest based on principal in the first month, annualised)
    €7,200 / 12 = €600 (interest for first month)

    Then in the second month the balance is €200,000 - €309.29 = €199,690.71

    €199,690.71 * 0.036 = €7,189 (Interest based on principal in the second month, annualised)
    €7,189 / 12 = €599.07 (interest for second month)

    So again the payment of €909.29 is taken but in this month €310.22 goes off the principal, and so on until the loan is cleared.

    I'm not sure what AIB are doing, but KBC are not adding interest to my balance. We've never missed a payment and are not in arrears.

    I know you said the online calculators are simplifying the calculation but this one exactly matched my first year of payments when the details were inputted.

    https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx


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    #39
    dotsman
    Registered Users Posts: 3,635 ✭✭✭dotsman


    TheChizler wrote: »
    I don't know, my understanding is that it's set up so you're paying the interest as soon as it's due, that's why the interest to principal payment split is highest at the beginning of the mortgage and the ratio declines from then on. The bank add up all the interest charged on the principle every day for the month and present you with the bill at the end for convenience but don't add it to the principle in the interim and charge compound interest. Otherwise a graph of the interest you're charged would look like a sawtooth, rising everyday until you pay the bill and it resets back to the interest on outstanding principle only.

    Hopefully that's not what's happening to the op, and they're just displaying the sum of the interest charged for the last 2 weeks. Should be easy to calculate and cross check, the formulas are standard. I think (correct me if I'm wrong) that if the two values are equal that they're not compounding it, if they were the second value would be the first plus interest.

    The bank make money from interest on principle, not interest on interest unless you're in arrears.

    Found this in the ts and Cs for KBC. Only applies to arrears.

    Wheety wrote: »
    They're not giving you money for nothing. They're charging interest.


    Wheety wrote: »
    I checked my statement. My interest is never added to the principal.

    On a mortgage of €200k over 30 years at 3.6% the monthly payment is worked out at €909.29.

    At the end of the first month, the bank takes this amount and applies €600 of it to the interest from that month, the rest (€309.29) goes off the principal.

    €200,000 * 0.036 = €7,200 (Interest based on principal in the first month, annualised)
    €7,200 / 12 = €600 (interest for first month)

    Then in the second month the balance is €200,000 - €309.29 = €199,690.71

    €199,690.71 * 0.036 = €7,189 (Interest based on principal in the second month, annualised)
    €7,189 / 12 = €599.07 (interest for second month)

    So again the payment of €909.29 is taken but in this month €310.22 goes off the principal, and so on until the loan is cleared.

    I'm not sure what AIB are doing, but KBC are not adding interest to my balance. We've never missed a payment and are not in arrears.

    I know you said the online calculators are simplifying the calculation but this one exactly matched my first year of payments when the details were inputted.

    https://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx

    Guys, we seem to be going around in circles. Please trust me on this. Every bank in the world charges compound interest. It has to. They would be losing ridiculous amounts of money if they didn't. It is the very basics of finance and the value of money. What you are seeing in your statement (or on the online mortgage calculator) is a simple view of the interest and the figures have already taken in to account any compounding.

    As per above, they specifically call this out for arrears. Why? Because the moment you deviate from the current repayment schedule, it messes with the predicted compounding.

    Mortgage (and loans in general) repayment figures are always simplified to enable you to pay back the same amount every month (assuming interest rates stay the same). However, there are different numbers of days in different months. Likewise, the monthly repayment date may fall on a weekend/bank holiday resulting in the repayment actually being made a few days later. Yet, the payment you make doesn't change. That is because the loan calculator has taken all this in to account and returned a simple "consistent monthly repayment" that masks all this. Believe me, designing and testing an accurate loan calculator, that accommodates complex optionality is quite challenging!

    Here is a brief description of how it works: https://www.investopedia.com/ask/answers/040315/what-does-it-mean-when-interest-accrues-daily.asp

    Here's, what I believe to be, a Junior Cert level maths example describing compound interest (see page 17): https://www.projectmaths.ie/documents/modulars/4/FinancialMathsExtraQuestions.pdf

    In this simple case, the interest is compounded annually, i.e. added to the balance from which all future interest is calculated. In mortgages, it is much more complicated, but the same principle.

    Or, think of it another way and consider your regular savings account. Whenever interest is added to the balance, you earn interest on the interest.

    In case anybody hasn't guessed it yet - I kind of work in this area, so know what I'm talking about (I design IT solutions for banks, mainly in the Credit space and have worked with a number of Irish banks and financial institutes over the years).


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    #40
    TheChizler
    Registered Users Posts: 9,403 ✭✭✭TheChizler


    I knew what compound interest is, the question is whether it is applied to mortgages as well as savings accounts, which is standard. I'm away and not willing nor able to do the maths right now, hopeful in a few days


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    #41
    Darc19
    Registered Users Posts: 3,817 ✭✭✭Darc19


    This site will show you how payments work but on a monthly basis

    https://www.amortization-calc.com/mortgage-calculator/

    Generally interest is applied on a daily closing basis, but as mortgage payments are usually made at the beginning of the month, the apr quoted includes the compounded interest.


    Similarly if you had deposits in the bank you receive compounded interest on the daily balances

    At low rates, it's barely noticeable

    Eg 3% annual = less than 0.01% on a daily basis.

    On a new mortgage the compound is about 2c per €100,000 per day and reduces gradually over the term of the loan. But usually people pay their mortgage at the beginning of the month, so they are slightly ahead.

    BTW, you can change the payment date to the 28th of each month without any issues, but the compound interest will add about 50c / €100,000 balance per month.


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    #42
    Snotty
    Registered Users Posts: 1,298 ✭✭✭Snotty


    This got a lot more complicated than was needed.
    Ignore when interest is applied or when payment is taken, just go on a mortgage calculator and see if the deductions/balance from your mortgage, match with the calculator.
    If they match, no issue, if they don't, ombudsman


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    #43
    bb12
    Registered Users Posts: 876 ✭✭✭bb12


    there was a point when i monitored my mortgage balance daily...the outstanding amount varied wildly day to day...like up 700 one day then down 300 the next day etc etc...however when i got my annual statements the total outstanding was always correct as per the amoritization calculations.


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    #44
    L1011
    Moderators, Business & Finance Moderators, Motoring & Transport Moderators, Society & Culture Moderators Posts: 67,624 Mod ✭✭✭✭L1011


    The addition of interest to the balance shown for mine only happens quarterly - used to be well over one month's payment so you'd see the balance jump *up* after making a payment 4 times a year!


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