Calculating Tracker Repayments over time?

stranex

I'm thinking of moving to a tracker rates myself (currently in the middle of applying for their 5 yr fix at 5.77% which has been approved).

My question relates to how payments are calculated for Tracker mortgages...

If I understand correctly the monthly repayments are calculated on the interest on your loan plus a sum towards the capital. As you pay each month, your "loan balance" is effectively reduced by whatever your capital payment was and the interest then calculated on this new, lower amount PLUS a larger chunk of capital.....both adding up to the same total amount each month?

So........As time goes on, your interest payment becomes smaller and your capital payment becomes larger but both continue to add up so the total monthly payment remains the same.

Now, what happens when interest rates change? For example;

I have a mortgage for £350k and after a year I have paid off £8k worth of capital meaning my "balance" on the loan is £342k. At this point interest rates go up by say 1%. Are my new repayments based on the interest of the balance of £342k or, on the original loan amount of £350k?

If the interest part of the repayment is based on the remaining balance of the loan then surely over time, the effect of interest rates changes on your total monthly payment are diminished? For example;

In year1 of a 25yr 5.77% mortgage, the interest part of a £350k loan would be approx £1500 and the capital payment approx £800 (total £2300).

In year 24 (assuming tha rate stays the same....it won't of course but bear with me!) the balance on the loan would be approx £20k, the interest payment each month approx £100 and the capital payment approx £2200 (total still £2300)

Therefore, if the interest is calculated on the balance of the loan, a "theoretical" rise in the rate to 10% in year 1 would mean repayments almost doubling (interest payment doubling to approx £3000, capital the same at £800=total £3800) but in year 24 when the balance is only £20k the repayment would hardly change at all (interest payment rises to approx £200, capital the same at £2200=total £2400).....still with me?!?!

Of course if I am wrong and the interest is continually calculated on the original loan amount of £350k no matter what your "balance" is, then in year 24 the effect of the "theoretical" rise would be same as in year 1?

Hope you're still awake!?

irn_bru

It's calculated on the oustanding balance