Really Silly Question

Jacka87

Ok this might seem like a really silly question so please go easy on me. Also was not sure of the best forum to post this, mortgages or mortgage free wannabe.

I know how a repayment mortgage works in principle, you pay the interest on the loan value plus an amount of repayment. So lets say you borrow 100k at 5%, over the first year you pay the interes on the 5% plus an amount to cover the repayments so that at the end of 25 yrs the mortgage is paid for. The cost can be worked out then and there assuming no interest rate changes, say 25yr fixed rate. Easy maths!

I get that bit but a bit confused with how its worked out particularly thinking about fixed rate deals at the moment. So lets say you fixed at 5% for 10 yrs and you paid every month the exat figure. At the end of 10yr period you would have 15 yrs left at svr. However what happens if during that time the interest rate was below 5% like say just now, that would mean that you will have paid more, does this get accounted for at the end of 10yrs so maybe you now only have another 10yrs as opposed to 15? And vice versa if the rates actually went up.

Also how do they account for overpayments if any are made. I know the interest from some lenders are calculated instantly and some annually but does this mean that if the interest rates where to rise and you overpayed the effet would be cancelled out even though its a fixed rate mortgage?

Sorry if this seems a bit dumb, I am having a very confusing day and think I confused myself!

_Andy_

Jacka87 wrote: »

I get that bit but a bit confused with how its worked out particularly thinking about fixed rate deals at the moment. So lets say you fixed at 5% for 10 yrs and you paid every month the exat figure. At the end of 10yr period you would have 15 yrs left at svr. However what happens if during that time the interest rate was below 5% like say just now, that would mean that you will have paid more, does this get accounted for at the end of 10yrs so maybe you now only have another 10yrs as opposed to 15? And vice versa if the rates actually went up.

No it doesn't, that's the whole point of the rate being fixed, i.e. no matter whether the base rate goes down or up, the interest being charged on your mortgage stays at the same rate.
After the fixed rates ends, the SVR is dependent or influenced by what the base rate is at that point.

PasturesNew

Jacka87 wrote: »

...what happens if during that time the interest rate was below 5% like say just now, that would mean that you will have paid more, does this get accounted for at the end of 10yrs so maybe you now only have another 10yrs as opposed to 15? And vice versa if the rates actually went up.

No, you took out a fixed deal. You pay what you agreed, you didn't make any overpayments. The same if interest rates went to 30%, at the end of your deal you'd not owe more.

A fixed deal is you promise to pay £X/month for that time and it's fixed.

Jacka87 wrote: »

Also how do they account for overpayments if any are made.

Not relevant because there are none.

Jacka87 wrote: »

I know the interest from some lenders are calculated instantly and some annually but does this mean that if the interest rates where to rise and you overpayed the effet would be cancelled out even though its a fixed rate mortgage?

Not relevant. It's fixed.

Jacka87 wrote: »

Sorry if this seems a bit dumb, I am having a very confusing day and think I confused myself!

When you sign up for a fixed deal you are committing to paying £X/month - and they commit to not changing your interest rate. One of you will "lose out" in the end, but neither of you know which one that will be.

With a fixed rate you're taking out the risk of interest rates rising -v- them falling. You are fixing how much you will be paying for X months/years to make it easier for you to budget.

Jacka87

Thanks for the response. I get the fixed rate bit quite clearly, however I do see mortgage providers offering fixed rate deals along with overpayment facilities. RBS for example offer a 10yr fix with an allowance for up to 10% of the loan value to be overpayed per yr. So how would this work?

_Andy_

Your overpayments reduce the balance of the mortgage, which then reduces the term of the mortgage.

Jacka87

Thanks Andy, just another part that I am not quite getting.

The current fixed rates are around 5% whilst the boe interest rate is at 0.5%. The lender obviouslly factors in the risk that rates will rise when they set the rate for the fixed interest rate and thus the difference in the current rates.

However is there a way of working out how much of my payment covers the interest and how much covers repayment. I know that the repayment percentage rises towards the end of the mortgage as the amount of interest drops. However lets say I am paying 5% and the rates are at 0.5% as they are now, if the bank continued to contribute the same amount to the capital then they would be sitting on a larger interest proportion, would that then go into the banks own capital to allow them to cope in the future when say interest rates go upto 10% but I am still only paying my fixed rate of 5%?

_Andy_

Jacka - google 'amortization calculator'.

Re the base rate etc, you need to bear in mind that a lender's mortgage funding isn't based on the base rate.