The Interest has decreased but the Capital Repayment has increased, why??

tinacls

Hello, this is my first post so I hope I have placed this in the right place.

I am on a variable rate capital repayment mortgage at 1% above Bank of England base rate to be repaid over 22 year (after being interest only for the first 3 years). The interest is calculated on a daily basis. My interest has been decreasing.... lovely! But looking at my statement it seems the Capital repayment element has been increasing.
ie. Nov ’08 Payment taken by bank £1509.45, interest on statement £1108.98, therefore Capital repayment £400.47
Feb ’09 Payment taken £1154.67, interest £557.03, therefore Capital Repayment £597.64
Have I read these figures correctly??
The capital element had been pretty constant at £400 a month. I have spoken to the bank and they say I’m not repaying my mortgage any quicker.
They have not been very helpful! I have asked to see the equation they use to calculate my payments but the call centres say then do not have it as it ‘very complicated’. Being as I have a maths degree I explained this would not be a problem but have still got no further.
I just don't understand why the Capital element would have changed so much in such a short time? Is my bank behaving correctly?
Any help would be gratefully appreciated.
This is a great site. Many thanks Tina

handful

If you use this calculator, enter the amount and term at the point you started on the repayment mortgage and it will tell you what the payments should be.

http://www.moneymadeclear.fsa.gov.uk/tools.aspx?Tool=mortgage_calculator

Robert_Sterling_3

As every maths graduate knows if the monthly payment is kept the same then obviously when the interest goes down the capitall repayment goes up. A lender might only change the monthly rate once a year. It is easy enough to calculate the
interest daily but it is not a good idea change the monthly payment daily. :eek:

lukekelly_2

Your bank is correct. Whilst the general model is slightly messy imagine you only have two payments on your mortgage and that the mortgage is £10,000 with 10% or 1% interest.

£10,000 at 10% with two payments both of £5,761.90:

• First payment: £1000 interest and £4,761.90 capital leaving a debt of £5,238.10.
• Second payment: £523.81 interest and £5,238.10 capital leaving a debt of £0.

£10,000 at 1% with two payments both of £5,075.12:

• First payment: £100 interest and £4,975.12 capital leaving a debt of £5,024.88.
• Second payment: £50.25 interest and £5,024.88 capital leaving a debt of £0.

In particular, note how with the higher interest rate you initially pay less capital but at the end pay more. With the lower interest rate you pay more capital initially and less at the end. To keep even payments, lower interest rates require higher initial capital repayment.

As a fellow maths graduate (and current active mathematician), you should revise your maths! I'd been forlornly hoping that mathematicians would be a rare area of society not completely bamboozled by mortgage calculations but I appear to be wrong again!

Robert_Sterling_3

Well said Luke

Have you come across "The Monty Hall Problem"

http://www.youtube.com/watch?v=mhlc7peGlGg

This link is to a Mathematical Problem not to a business.

What do you make of it CLIO?

tinacls

Thank you all for your help.

My issue is that my bank do not keep my payments even .....

I am retiring with an equation and a pencil and paper. I think the only way I'm going to get my head round this is to go back to basics.

The comments about the amount of extra capital I am paying now reducing capital payments in future years makes sense.

I guess stupidly I always thought of the capital repayment as a fixed increasing curve. The change in interest rates changes shape of that curve. I'm sure those little X's & y's will help me figure it out.

Thanks again Tina

ps. I never touched on mortgage calculations in my degree but at least I can read the equations I've found online so those years of study might not be all a waste! Oh but I can remember how to map movement of air of over a planes wings if anyone needs it!!

dunstonh

My issue is that my bank do not keep my payments even .....

Thats beacuse the interest rate is variable and there are not the same number of days each month or even in the year (in case of leap year).

CLAPTON

tinacls wrote: »

Thank you all for your help.



Thanks again Tina

ps. I never touched on mortgage calculations in my degree but at least I can read the equations I've found online so those years of study might not be all a waste! Oh but I can remember how to map movement of air of over a planes wings if anyone needs it!!

As it so happens I am just starting to read a book on this subject.... what exactly is it that produces the aircraft's lift?

Robert_Sterling_3

It is the shape of the wings.
Flat underneath and curved on the top.
This causes the air pressure underneath the wing to be higher than the air pressure above the wing.

You can illustrate this as follows

One sheet of A4 paper
Hold the paper with a finger and thumb at two corners on a shorter side of the sheet. Let the paper hang down.

Blow over the top of the paper and the paper will rise.

caracal_77

Robert_Sterling wrote: »

It is the shape of the wings.
Flat underneath and curved on the top.
This causes the air pressure underneath the wing to be higher than the air pressure above the wing.

Yuou can illustrate this as follows

One sheet of A4 paper
Hold the paper with a finger and thumb at two corners on a shorter side of the sheet. Let the paper hang down.

Blow over the top of the paper and the paper will rise.

One of the reasons why I like this site so much...;)

rjar20rjar

It seems that people are misunderstanding Tina's issue. I have also noticed that my lender is now front loading my capital repayments by some formula that they alone are using, so although my mortgage payments have decreased with the interest rate cuts they have not decreased enough due to the fact that they have increased the capital repayments to get more money in now rather than later, if I continue on this capital repayment rate I will repay my mortgage before the agreed term. In reality they will adjust down (previously unheard of) the capital payment at some time in the future when they decide fit