Effect of interest rate changes

military_medium

Hi all,

Sorry if this has been asked before - I couldn't find a relevant thread if it has. I am somewhat puzzled by the effect the changes in interest rates have had on my monthly repayments on my repayment mortgage. My payments are not going down by as much as they would do if my mortgage were interest only. It would appear that the portion of my mortgage payment that simply pays off the interest falls as the interest rate falls, yet I'm not aware that the term over which I'm paying off my mortgage has dropped. Can anyone explain why this is.

I'm sure the explanation is simple but I can't get my head around it. I don't have my exact figures to hand.

Cheers

Cannon_Fodder

The fact you say payments are going down is why your term is not changing.

You would need to ask them to maintain the same level of total monthly payment, so that the "spare" amount (that amount of interest that is no longer charged) can to be set against capital instead, then you would gradually affect the term.

i.e if you were paying £500 split, £300 interest, £200 capital repayment;

then if interest rate halves, for example, £150 interest, £350 capital repayment would be the split.

(if you were Interest Only, then it would be the £500 that halved, making you £250 better off)

Check your Terms and Conditions, or just ring them up and ask if its possible. Might vary by mortgage type/company.

military_medium

Thanks for the response. I understand the point you make. I don't want to decrease the term of my mortgage, but I just don't understand why my mortgage payments are not being reduced as much as the interest rates suggest they should be. For instance, about six months ago, the interest rate on my mortgage was 5.84%. I was repaying £847.74 a month, of which £647.27 was interest and £200.45 was repayment. Now the interest rate is 2.24%, and the total payment is £590.71, which is £248.27 interest and presumably £342.44 repayment. My question is, why has my total monthly mortgage repayment not decreased as much as the interest part of my monthly payment?

Gorgeous_George

because the capital owed has not decreased. It still needs to be paid back.

GG

Cannon_Fodder

Your interest has dropped by 61%. You are paying 61% less interest. So that bit is fine.

But, only interest payments can be affected by changes in interest rates.

Your capital will, for the time being, remain to be repaid.

However, at the figures indicated you are already paying off an extra £142 a month of the capital, so in a few months that will start to have a larger effect. If these low rates last a couple of years, the interest will fall futher and the repayment portion of your payment can grow further. (subject to Ts&Cs)

Don't quite understand why the total payment has dropped, but the repayment has gone up - was that by choice/design/automatic?

If you had kept the £847 monthly payment going, only £248 being interest, it would mean you were paying capital off at £600 a month...!

But maybe that's the problem - your mortgage's terms may limit overpayments, so they've automatically adjusted it to fit the terms...?

You could set aside the "spare" from £842 to £591 = £251 each month, and check your Ts&Cs to see if you can do an annual lump sum overpayment to put a dent in the capital owing, perhaps?

military_medium

Cannon_Fodder wrote: »

Don't quite understand why the total payment has dropped, but the repayment has gone up - was that by choice/design/automatic?

That's the bit I don't understand either. Thanks for your help though. I shall go through the T&C's in more detail to try and find out.