Mortgage repayment, split between interest & capital

foreversummer

Hi all

For no other reason than I'm intrigued, I've just worked out how much (or little!) interest I'm paying on my repayment mortgage at present using a mortgage amortization calculator.

I obviously expected the interest element to have reduced significantly, but I was suprised to find that the amount I am paying towards the capital has gone up somewhat.

I just can't get my head round this one. If anyone has an explanation I would be interested.

Foreversummer

pixiepie99

I think we need some figures.

At the start of your mortgage term you'll be paying far more interest than capital off. The further on you get in your term, the less interest and more capital you are paying.

lukekelly_2

High interest rates mean a sharper change between early in your mortgage, when almost everything you pay is interest, and late in your mortgage, when almost everything you pay goes towards the capital. Low interest rates result in a smoother transition and in particular a quicker rate of capital repayment early in the mortgage. In practice what this means is that low interest rates don't just mean lower monthly interest payments but also a quicker reduction in the size in your mortgage.

lukekelly_2

Some figures for you. £100,000 mortgage, no fee, 25 year term. At 4% fixed you'd be paying £528 a month and at 5% you'd be paying £585 a month. Over 5 years this means you'll pay £3,405 less. The amount of debt remaining after 5 years would be £87,105 and £88,580 respectively. So even though you pay less a month you end up paying more of your debt off. The 4% rate is a whole £4,881 cheaper than the 5% once you combine these together.*

*And also gives additional liquidity benefits.

foreversummer

pixiepie99 wrote: »

At the start of your mortgage term you'll be paying far more interest than capital off. The further on you get in your term, the less interest and more capital you are paying.

Yes, that's what I thought. I remortaged last year and based on the interest rate then which was 5.44% I was paying approx £530 interest and £290 capital. Now my interest rate has dropped to 1.94% I am paying something like £170 interest and £440 capital, ie repayment has gone down from approx £850 to £606.

Just wondering why the decrease in interest rate ups the amount of capital repayment.

Foreversummer

foreversummer

lukekelly wrote: »

Some figures for you. £100,000 mortgage, no fee, 25 year term. At 4% fixed you'd be paying £528 a month and at 5% you'd be paying £585 a month. Over 5 years this means you'll pay £3,405 less. The amount of debt remaining after 5 years would be £87,105 and £88,580 respectively. So even though you pay less a month you end up paying more of your debt off. The 4% rate is a whole £4,881 cheaper than the 5% once you combine these together.*

*And also gives additional liquidity benefits.

Yes, I can sort of see this. However, supposing I had a fixed rate of 4% for the term of my mortgage, and someone else borrowed exactly the same at a fixed rate of 6% for the term of their mortgage (the amount of borrowing and term being the same), would my mortgage at 4% be paid off quicker. Surely not.

Foreversummer

lukekelly_2

Different way to look at it. With your previous £800 a month, at the start £500 is interest and £300 capital but at the end of the mortgage you'd be paying almost all that £800 a month towards repaying the capital. With your new amount, if you were still paying £300 a month in capital and the new amount of say £200 in interest you'd be paying of the same as before now. But near the end of your mortgage, when the interest becomes small, you'd only be paying off £500 a month in capital. Thus you need the higher initial capital repayments to `compensate' for the fact that near the end of the mortgage you'll be paying off a smaller amount of capital than you would be if you were still at the old high rate.

getmore4less

I look at it the other way round,

If the interest rate was zero then the payments would all be equal equal each month

Then if you add a little bit of interest then the total payment go up each month but the opnes at the begining go up by more than the ones at the end(reducing capital owing) so to make them equal again you move some of the capital payment from payment one to the last payment and do this for all payments to make them equal again.

The higher the interest the more you have to move.

Try it with two/three payments to make it easy to understand.

pixiepie99

getmore4less wrote: »

I look at it the other way round,

If the interest rate was zero then the payments would all be equal equal each month

Then if you add a little bit of interest then the total payment go up each month but the opnes at the begining go up by more than the ones at the end(reducing capital owing) so to make them equal again you move some of the capital payment from payment one to the last payment and do this for all payments to make them equal again.

The higher the interest the more you have to move.

Try it with two/three payments to make it easy to understand.

This. Exactly this. :T :T :T

pixiepie99

foreversummer wrote: »

Yes, that's what I thought. I remortaged last year and based on the interest rate then which was 5.44% I was paying approx £530 interest and £290 capital. Now my interest rate has dropped to 1.94% I am paying something like £170 interest and £440 capital, ie repayment has gone down from approx £850 to £606.

Just wondering why the decrease in interest rate ups the amount of capital repayment.

Foreversummer

Also, if you can afford to maintain your mortgage payments at £850 you would be paying off an additional £244 capital per month which will reduce the term of your mortgage and the total amount of interest you have to fork out. Whack that into an overpayment calculator and see how much you save!

foreversummer

Thanks all. Yes, it is becoming clear now.

Yes, I am certainly stacking up the overpayments as well. I feel so fortunate to have a good tracker rate. I nearly fixed last year.

Foreversummer