Interest Only Mortgage Query

Boozer

Thrugelmir wrote: »

If I lent you £200,000 at an interest rate of 5% per annum over 15 years. Then the annual interest charge would be £10,000, or £150,000 over 15 years. At the end of 15 years you still owe me the £150,000 so will continue to pay interest.

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I think you need to change this, although you have paid 150K in interest, you still owe 200K, not 150 as stated.

getmore4less

I think you don't undrstand how it works
lets annotate your example with a £200k mortgage at 5% with a £50k capital payment at year 4

megarchie wrote: »

I appreciate your replies!
I am aware that we did not have a capital repayment mortgage!
In simple terms I knew we had to pay the interest only on an Interest Only mortgage.
Let us say that the 15 years of interest mortgage = 100% of the Interest part of the mortgage + the eventual capital.

OK so your £200k costs 5% per year in interest thats £10k per year £150k total.

I was under the belief that after 4 years we had then paid off 4/15ths of the interest and only had another 11/15ths of the interest to pay!!!

So at this point you have paid £40k and still owe £110k at £10k per year.

It seems to me that as soon as I increased the mortgage payments after 4 years to reduce the capital the whole mortgage started again.

So lets say you pay off £50k so now owe £150k at 5% thats £7500py so you now owe £82500 over 11y in interest.

So by paying off 1/4 of the debt you reduce the future amount of interest owed by 1/4, it did not start again they just recalculate the new interest.

The whole scenario seemed that I now had an 11yr mortgage and that the previous 4 years of paying was down the drain.

It was interest for the money you borrowed.
Think of it as renting money, you have to give it back at the end like renting a house.

In simple, simple terms, if I owed you £15 in interest and had paid you £4 pounds of it then I only owe you another £11. Why should I still owe you £15?

You don't you owe £11 AND the debt you startd with

Am I still talking rubbish and that there is something I fundamentally don't understand here???

Thrugelmir

Boozer wrote: »

I think you need to change this, although you have paid 150K in interest, you still owe 200K, not 150 as stated.

Not awake this morning........ Thanks

JimmyTheWig

megarchie wrote: »

I was under the belief that after 4 years we had then paid off 4/15ths of the interest and only had another 11/15ths of the interest to pay!!!
It seems to me that as soon as I increased the mortgage payments after 4 years to reduce the capital the whole mortgage started again. The whole scenario seemed that I now had an 11yr mortgage and that the previous 4 years of paying was down the drain.
In simple, simple terms, if I owed you £15 in interest and had paid you £4 pounds of it then I only owe you another £11. Why should I still owe you £15?
Am I still talking rubbish and that there is something I fundamentally don't understand here???

Yes, I am afraid there is something you fundamentally don't understand here.
The short answer is that they are right.

I'll try to explain, but I can promise you that whether or not you understand the explanation or not, you are not being swindled here...

Interest (on a mortgage, credit card, overdraft, savings account, etc) isn't a fixed amount of pounds. It is a percentage of the amount you owe that is charged each year.
Lets say your interest rate was 5%. Now, 5% of £200,000 is £10,000. This means that every year you have to pay £10,000 in interest. Notice that at this point I haven't said how long you are paying this for. It doesn't matter. You pay them £10,000 interest in a year and at the end of that year you still owe them £200,000 - that's what interest-only means. Because you still owe them £200,000 the interest for next year will also be £10,000. In some ways you can look at it exactly like having a 4 year interest-only mortgage then a 11 year repayment mortgage.

Now, how much have you paid in overpayments? Have you made these as lump sums or by increasing your monthly direct debit? (Have you even made any overpayments?) Assumng you've paid in lump sums, I can imagine one of the following has happened...
1. Your monthly direct debit has stayed the same. This means that each month you are in effect reducing your balance. Your mortgage balance should have gone down by more than the amount of overpayments you have made.
2. Your monthly direct debit has dropped. This means you would have had more spending money in your current account each month. Your mortgage balance should have gone down by the amount of overpayments you have made.
3. Your monthly direct debit stopped for a while. You would have had lots more spending money in your current account! They would have done this if they thought your overpayments were actually just your regular payments and so didn't take direct debits until they needed to again. Your mortgage balance will still be £200,000.

Obviously all of the above will depend on interest rate changes, mortgage fees, etc.

If you want a more specific explanation then we will need to know...
* The original amount you borrowed.
* The interest rate (and if it varied over the 4 years or been fixed).
* Your initial monthly direct debit.
* The amount, frequency and method of any overpayments made.
* The amount taken by direct debit following overpayments.
* The current balance of your mortgage.

[Deleted User]

Without wanting to be rude, I'm a little shocked at the ignorance of the original poster - surely this is a windup?

Are you seriously telling me that you thought a 15 year interest-only mortgage meant that at the end of those 15 years you would have paid off all the interest they were going to charge on the property?

I'm very sorry, but I just can't believe you didn't understand something quite as fundamental as that.

kai666

Deleted_User wrote: »

Are you seriously telling me that you thought a 15 year interest-only mortgage meant that at the end of those 15 years you would have paid off all the interest they were going to charge on the property?

Is that a typo? because at the end of a 15 year interest only mortgage, you will have paid all the interest, but still owe all the capital if thats all you have paid

[Deleted User]

kai666 wrote: »

Is that a typo? because at the end of a 15 year interest only mortgage, you will have paid all the interest, but still owe all the capital if thats all you have paid

Not a typo, but we're crossing wires! The OP will not have paid 'all the interest' but 'all the interest charged that year' - that's the issue!

The OP thinks - as far as I can tell - that he's paid off all the interest he's ever going to pay on the capital sum in those 4 years - e.g. he thought that the interest was a fixed lump sum and not an ongoing %.

Or, in other words, he thought that after 4 years he had paid off all the interest that the lender intended on charging and so from then on had been reducing the balance, without realising that interest is reapplied annually/monthly/daily.

The_White_Horse

its unreal that such dumb people can be lent so much money (if true).

listen pal, if you borrow 200k on an interest only mortgage, every month you pay the interest on it. It would be the same monthly payment if you had the mortgage for a month or 100 years. the only time it will change is once you pay back the 200k.

so, lets say you go the full 15 years paying the interest, at the end of the15 years, you still owe the original 200k. if you can't afford to pay the 200k back, you will have to keep paying the interest. it doesn't stop until you pay back the actual loan - although it may reduce if you pay back part of the loan (depending on what interest rate does).

surreybased

Hi,

Can this level of understanding be real? I've been concerned about IO mortgages as I just think people are hoping for house prices to rise to pay back the capital.
I wonder if people should be given the full loan costs, over the life of the mortgage at the outset like with loans..i.e you borrow £5k but with interest over 5 years you'll actually repay £7.5k

Might make people realise the 'true' cost of house purchase.

[Deleted User]

surreybased wrote: »

Hi,

Can this level of understanding be real? I've been concerned about IO mortgages as I just think people are hoping for house prices to rise to pay back the capital.
I wonder if people should be given the full loan costs, over the life of the mortgage at the outset like with loans..i.e you borrow £5k but with interest over 5 years you'll actually repay £7.5k

Might make people realise the 'true' cost of house purchase.

They are given the full costs in the 'key facts' document sent to them by the lender!