Desperate for remortgaging help!

Aiadi

I'm hoping someone can shed some light on something that's been confusing me for some time now...

I want to remortgage but am scared about the following - will I end up paying more in the long term by switching because when I start the new mortgage the amount of money which goes towards repaying the capital will be less than it is now? I have been over my mortgage statements and can't understand how the amount which goes towards interest and that which goes towards capital are calculated

I took out a mortgage of £126,000 in Nov 2002, 2 year 1.01% discounted off BoE base rate. It is a repayment mortgage. After the discounted period it went to a variable tracker- 1% above base rate- so at the moment the rate is 5.5% with a capital balance of £116,500. I have worked out (I think) that to remortgage with all fees and everything it would need to be a decent rate/deal in order that I would save any money over the next 2 years.

So what's really bothering me is this proportion of capital that is paid back every month- I know it goes up over the years but can't understand why, and more importantly am scared to remortgage in case I end up practically just paying interest again. Sorry for the long post- Can someone help?

avondale

I',m no mortgage expert as you will probably gather when reading this post, but you are paying far to high an interest rate at 5.5% which i assume is there svr. There are some good fixed rate mortgages out there you have got to look, i have recently got a 3 yr fixed rate at 4.39%. I'm fairly new to the mortgage game if you can call it that, but have just remortgaged and previously only had a two year fixed rate. So as you have stated, to start with it doesn't seem that you are making much headway in terms of knocking down your balance. But i would say you have to look around and see what suits your circumstances, for me a fixed rate is what suits me best as i know exactly what is coming out of my account. But what suits me might not meet your individual needs. The only thing i can suggest is to look at all the fees regarding whatever remortgage you go for , as some which have very low fees, ie free valuation/ survey may make the fees up in other areas.

Aiadi

avondale wrote:

I',m no mortgage expert as you will probably gather when reading this post, but you are paying far to high an interest rate at 5.5% which i assume is there svr. There are some good fixed rate mortgages out there you have got to look, i have recently got a 3 yr fixed rate at 4.39%. I'm fairly new to the mortgage game if you can call it that, but have just remortgaged and previously only had a two year fixed rate. So as you have stated, to start with it doesn't seem that you are making much headway in terms of knocking down your balance. But i would say you have to look around and see what suits your circumstances, for me a fixed rate is what suits me best as i know exactly what is coming out of my account. But what suits me might not meet your individual needs. The only thing i can suggest is to look at all the fees regarding whatever remortgage you go for , as some which have very low fees, ie free valuation/ survey may make the fees up in other areas.

Thanks avondale, I am keen to remortgage and have been researching about it and reading up Martin's remortgaging guide, but I feel I need to get an answer to my question above about the proportion of payment that goes to capital before I can go ahead with the remortgage with a clear view of whats ahead!

Joe_Bloggs

The term of the mortgage and the interest rate, interact to affect the capital repayment schedule. One extreme is a one month mortgage. Capital payments will dominate interest payments in this situation as there is no time for the interest to have much effect and to have the effects compounded over the years.
The other extreme is interest only. The capital will never be repaid just with interest payments alone.
The faster the capital is repaid the less the interest charged, the shorter the term. A mortgage calculator could work out the term for a particular monthly repayment or numerous other various situations.

I like :- http://www.hsh.com/hbcalc.html
The amortization section does allow for mixed individual and regular overpayments. There are perhaps too many confusing and unrelated calculators features, for a beginner. If you mention the capital, term and interest rate we can all compare some hypothetical numbers and break the misconception regarding interest payments always dominating capital repayments in the early years.

A flexible overpayment facility is a good way to make capital payments dominate interest payments. The regular payment of re-mortgage fees does tend to dent the net benefit of remortgaging. My last remortgage cost close to £800 to change over. I am just breaking even on the deal 7 months later. I went for a 5 year deal rather than go through all that again.
J_B.

Aiadi

Joe_Bloggs wrote:

The term of the mortgage and the interest rate, interact to affect the capital repayment schedule. One extreme is a one month mortgage. Capital payments will dominate interest payments in this situation as there is no time for the interest to have much effect and to have the effects compounded over the years.
The other extreme is interest only. The capital will never be repaid just with interest payments alone.
The faster the capital is repaid the less the interest charged, the shorter the term. A mortgage calculator could work out the term for a particular monthly repayment or numerous other various situations.

I like :- http://www.hsh.com/hbcalc.html
The amortization section does allow for mixed individual and regular overpayments. There are perhaps too many confusing and unrelated calculators features, for a beginner. If you mention the capital, term and interest rate we can all compare some hypothetical numbers and break the misconception regarding interest payments always dominating capital repayments in the early years.

A flexible overpayment facility is a good way to make capital payments dominate interest payments. The regular payment of re-mortgage fees does tend to dent the net benefit of remortgaging. My last remortgage cost close to £800 to change over. I am just breaking even on the deal 7 months later. I went for a 5 year deal rather than go through all that again.
J_B.

Thanks J_B - maybe I'm being stupid but I still don't understand how the proportion that goes to capital is decided/worked out. In the early years where there is a larger capital, less money is paid back to capital than when the capital is much smaller down the line when more money seems to be paid back to the capital.

I think I won't understand this unless someone can give an example with numbers with an explanation of how the payments are worked out- Can someone help me out?

Joe_Bloggs

Here is an example:- Mortgage capital £116,500 at 4.8%. If the repayment term is 15 years then the payments are:-

£909, split initially, £443 to capital and £466 on interest.

The size of monthly increasing capital repayment overtakes the reducing interest payment in 8 months. The total paid remains the same each month. Total principle paid £116,500, interest paid £47,153 over the 180 months.

Lets do the same figures for a 20 years term. The initial repayment is:-

£756, split initially, £290 to capital and £466 to interest per month.

Total principle paid £116,500, interest paid £61,910. The initial interest paid per month is the same in both cases as the capital borrowed was the same. In the subsequent months the the smaller capital repayments have less influence on reducing the capital debt which generates the interest payment.

Another scheme is to overpay. By overpaying £154 a month to the £756 (=£909) you can turn the 20 year deal into the 15 year deal. This assumes the, penalty free, flexibility to do so. The lender also has to agree to treat overpayments so thet they reduce the term rather than have them to reduce the monthly repayment.

J_B.

Any takers for the 25 year illustration ? Or the detailed amortization mathematics with daily interest ?

Aiadi

Joe_Bloggs wrote:

Here is an example:- Mortgage capital £116,500 at 4.8%. If the repayment term is 15 years then the payments are:-

£909, split initially, £443 to capital and £466 on interest.

The size of monthly increasing capital repayment overtakes the reducing interest payment in 8 months. The total paid remains the same each month. Total principle paid £116,500, interest paid £47,153 over the 180 months.

Lets do the same figures for a 20 years term. The initial repayment is:-

£756, split initially, £290 to capital and £466 to interest per month.

Total principle paid £116,500, interest paid £61,910. The initial interest paid per month is the same in both cases as the capital borrowed was the same. In the subsequent months the the smaller capital repayments have less influence on reducing the capital debt which generates the interest payment.

Another scheme is to overpay. By overpaying £154 a month to the £756 (=£909) you can turn the 20 year deal into the 15 year deal. This assumes the, penalty free, flexibility to do so. The lender also has to agree to treat overpayments so thet they reduce the term rather than have them to reduce the monthly repayment.

J_B.

Any takers for the 25 year illustration ? Or the detailed amortization mathematics with daily interest ?

Thanks J_B, that has definitely helped me. You are very patient with me! Can I ask further questions? The only way I can work out the repayment part of the mortgage payments for the 2 examples you gave is by using online mortgage calculators. Is there any way to calculate the repayment part (I can manage to calculate the interest rate bit!) myself or is this too difficult?

Thanks again for the help, I may return before long with further questions!

Joe_Bloggs

The specific calculator on the page I mentioned was an offline version. It did not require Excel to work. You can also save your data.
Interest payable for the year is easy. Comming up with a sensible formula for the term requires a bit more than the symbols available to this forum. I know of an online and progressively detailed explaination of mortgage calculations. I will dig out the reference later.

Often trial and error with a simple mortgage calculator can help find the missing factor in most mortgage situations. If more people knew how to use these devices then there would be less questions asked about them . It is easy to make a mistake at first so get some independent verification of the numbers involved.

These numbers are only a guide. If the interest rate is variable then only the short term projections up to the interest rate change are valid. It might be a good idea to write down the existing capital owed and restart the projection/calculation again after the change. In the real world this is called remortgaging. Fees can be a significant factor that lenders hope you will bear .

J_B.

I did find this link for amortization calculation:-
http://ray.met.fsu.edu/~bret/am_derive/derivation.html

Aiadi

Thanks J_B - that link you posted made me :eek: