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

pwllbwdr

No. This has been explained above by lukekelly. Ignore all the business of keeping payments the same, over paying, and the like. It is nothing to do with that, nor is it anything to do with your bank putting money aside now and charging you less later. It is independent of those issues and is fundamental to capital and repayment and how that works with different interest rates.

The basis of capital and repayment (leaving aside changing interest rates, which are also a red herring) are that you are paying the same amount each month.

For a 25 year mortgage, your payments in the first year or two cover the interest and only a small amount of capital.

In the middle of your mortgage term of 25 years, the same monthly payment covers interest and rather more of the capital - because you now owe less and so your interest is lower.

In the last year or two of your mortgage the amount outstanding is relatively low, so the interest payment each month is relatively low, and so each monthly payment goes mainly to paying off capital.

OK, so now consider the effect of reducing the interest, again as a fixed amount over the 25 year term. That means that for a given capital balance you pay less. Again, at the start of your mortgage, your monthly payment covers mostly interest, and is lower than the first example as the interest rate is lower.

But now, in the last year or two, although we have a lower rate of interest, the money available each month to pay off your capital is lower - because your monthly payment is lower. That in turn means that you have to pay more off in the early years than you would with a higher interest rate.

That's why your proportion of payment to capital is rather higher now your interest rate is lower.

rjar20rjar

I agree but that is not what we are referring to. Let me explain.

If I pay a set amount each month the amount of capital owed decreases as I pay an increasing amount towards the amount owed, as correspondingly the interest portion of the payment decreases as I owe less capital. To achieve this in a way that they do not need to continually reduce my payments the amount of capital portion of my payment should increase in a linear manner, for example I may pay £5 a month more as capital portion and £5 a month less in interest payment.. At the end of the mortgage term the capital portion will be the majority of the amount being paid each month.

If the interest rate decreases my lender decreases my payment to reflect the reduction in interest due on the capital.so in theory the ratio of capital and interest portions should change but the actual amount of capital still increases in the same linear fashion as before. Ensuring I reach a zero balance at the end of the mortgage term.

What is happening now is that instead of the capital repayment amount increasing by 0.5% per month the lender is increasing it each month by 10%, if they continued in this way the total capital will be repaid 10 years earlier than the term.

Why has this come to light ? Because the reduction in the interest rates is not fully reflected in the reduction in the monthly payments, the lender is making up the reduction in income to them by increasing the rate of capital repayment without my prior knowledge or consent.

Mortgage statements normally show how much capital is being repaid each month, forward projecting on the same increasing basis should show that the capital is repaid at the end of the term, if the lender significantly increases the monthly capital amount outside the linear tracking then either the loan will be repaid too early or the lender will need to reduce the capital repayment at a later date.

Interestingly lenders do not seem to reveal the capital repayment model they are using and if they can randomly vary that amount there are no stated parameters (e.g. minimum or maximum) that allow the borrower to anticipate or agree to ... in theory what is preventing them from deciding to double the capital repayment in lean times and half it in good times ?

rjar20rjar

An example to explain the previous post...

high interest rate:
Capital payment = £400 (30%)
Interest payment = £900 (70%)
Monthly payment = £1300 (100%)

Interest rate reduces, payment should be:
Capital payment = £400 (50%)
Interest payment = £400 (50%)
Monthly payment = £800 (100%)

But lender increases capital repayment::
Capital payment = £700 (64%)
Interest payment = £400 (36%)
Monthly payment = £1100 (100%)

Joe_Bloggs

I have read in previous posts that some lenders chose to respond to major interest rate drops by keeping the original repayment amount the same. This would have the effect of reducing interest charged per month, increasing the capital paid back per month, effectively reducing the term of the mortgage, but not changing the monthly amount paid.
It was left to the borrower to request a reduction in payments to reflect the new interest rate and restore the full term of the mortgage.
I could be wrong ?
J_B.

pwllbwdr

Joe Bloggs- you're right but that is not the issue related above.

rjar. Erm no. It is not linear and your illustration is simply not right. I tried to explain it above, but clearly didnt get it clear enough.

rjar20rjar

Perhaps a model would help ?

From your previous reply...
The basis of capital and repayment (leaving aside changing interest rates, which are also a red herring) are that you are paying the same amount each month.

I am paying the same payment each month but with slightly more towards the capital than the previous month and slightly less on interest.

For a 25 year mortgage, your payments in the first year or two cover the interest and only a small amount of capital.

Yes that is true.

In the middle of your mortgage term of 25 years, the same monthly payment covers interest and rather more of the capital - because you now owe less and so your interest is lower.

Yes that is true also

In the last year or two of your mortgage the amount outstanding is relatively low, so the interest payment each month is relatively low, and so each monthly payment goes mainly to paying off capital.

Yes.

OK, so now consider the effect of reducing the interest, again as a fixed amount over the 25 year term. That means that for a given capital balance you pay less. Again, at the start of your mortgage, your monthly payment covers mostly interest, and is lower than the first example as the interest rate is lower.

Yes.

But now, in the last year or two, although we have a lower rate of interest, the money available each month to pay off your capital is lower - because your monthly payment is lower.

I am at the start of my mortgage term and the the lender acknowledges that in the last few months the capital repayment amount has increased at a rate of 10% more than each previous month, therefore the amount to pay off my capital is actually higher each month.

That in turn means that you have to pay more off in the early years than you would with a higher interest rate.

This is the interesting point.... if you have a loan with interest you normally pay the interest on that outstanding amount, if the interest rate decreases then the total amount you pay to the lender decreases, if for arguments sake the interest now remained as it is for the remainder of the term at what point would the capital amount being repaid each month decrease ?

spmc

This is not an easy question to answer without going into the maths. There is a formula but it isn't linear and therefore it isn't easy to simplify. For a repayment mortgage the payments do reduce when interest rates are reduced but the monthly reduction is not equivalent to the full reduction in interest on the outstanding balance. As stated above at the beginning of a repayment mortgage the interest is a big chunk of the repayment but towards the end the interest forms very little of the payment.

If you have a repayment £100,000 mortgage over 25 years and you compare a 3% interest rate and a 6% interest rate the 3% mortgage payment at £474/month will have paid off more capital after 5 years than the 6% mortgage at £644/month - about £4,500 more - so you have paid more capital payments for that period.

However towards the end of the mortgage because interest rates are an extremely small proportion of the monthly payment the higher payments on the 6% mortgage will mean that the outstanding balance reduces more quickly and the balance ends up at £0 after 25 years for both mortgages i.e. the amount of capital paid off in the last 5 years is greater for the 6% mortgage. (In the last 5 years the 3% mortgage would pay off £26k of capital and the 6% mortgage would pay off £33K capital)

Of course it should be noted that the total interest paid on the 3% mortgage would be about £40k but for the 6% would be around £93k. The best thing to do is plug some numbers into a repayment calculator that provides a full schedule of monthly payments broken down into interest and capital and outstanding balance. One can be found here http://www.shiredirect.com/mortgages/mortgage-calculator/mortgage-repayment-schedule-calculator.php - you need to tick the amortization box to get the full schedule. I found this from a search so cannot vouch for anything on the site.

pwllbwdr

Yes SPMC. I (and lukekelly above) have tried to explain this but I don't think we've got the message across to some of the posters. It is only complicated if you don't understand the maths.

CLAPTON

rjar20rjar wrote: »

Perhaps a model would help ?

From your previous reply...
The basis of capital and repayment (leaving aside changing interest rates, which are also a red herring) are that you are paying the same amount each month.

I am paying the same payment each month but with slightly more towards the capital than the previous month and slightly less on interest.

For a 25 year mortgage, your payments in the first year or two cover the interest and only a small amount of capital.

Yes that is true.

In the middle of your mortgage term of 25 years, the same monthly payment covers interest and rather more of the capital - because you now owe less and so your interest is lower.

Yes that is true also

In the last year or two of your mortgage the amount outstanding is relatively low, so the interest payment each month is relatively low, and so each monthly payment goes mainly to paying off capital.

Yes.

OK, so now consider the effect of reducing the interest, again as a fixed amount over the 25 year term. That means that for a given capital balance you pay less. Again, at the start of your mortgage, your monthly payment covers mostly interest, and is lower than the first example as the interest rate is lower.

Yes.

But now, in the last year or two, although we have a lower rate of interest, the money available each month to pay off your capital is lower - because your monthly payment is lower.

I am at the start of my mortgage term and the the lender acknowledges that in the last few months the capital repayment amount has increased at a rate of 10% more than each previous month, therefore the amount to pay off my capital is actually higher each month.

That in turn means that you have to pay more off in the early years than you would with a higher interest rate.

This is the interesting point.... if you have a loan with interest you normally pay the interest on that outstanding amount, if the interest rate decreases then the total amount you pay to the lender decreases, if for arguments sake the interest now remained as it is for the remainder of the term at what point would the capital amount being repaid each month decrease ?

Maybe I'm missing the point, but when interest rates go down what usually happens is the lender does one of two things

1. keeps the monthly payments the same and hence the term is reduced
2. keeps the term the same and reduces the monthly payment

The most usual is to keep the term constant but often you can contact them and choose which you want.

CLAPTON

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.

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.

Thank you for replying although it's obviously off topic.
However, I've never understood the pressure argument in relation to the wing profile as that doesn't seem to explain why planes can fly upside down... I must get round to opening my book.