How does £1 equal £3?

DVardysShadow

JoeyGrey wrote: »

Thanks everyone, and thanks for the link lil_lisa. I showed the above calculator to my young colleague who has just bought her first house and is trying to give up smoking. She worked out that by putting her cigarette money into her mortgage she will knock 10 years off the mortgage and save a small fortune.

The lightbulb moment was wonderful to see firsthand

But if she carried on smoking, with any luck, she would have kicked the bucket before the mortgage was up. Think of the council tax she would save.

Gorgeous_George

It's a flawed argument anyway as it ignores the true value of money.

I'm not saying don't overpay but it's all about balance. There's lots of mortgage free corpses in the cemetery.

Over the coming years interest rates may well be lower than inflation. If so, overpaying will lose you money in real terms.

As far as I am aware, nobody's last words were ever 'I wish I'd paid more of my mortgage off'.

GG

tomstickland

DVardysShadow wrote: »

Actually, that £1 is worth £2.25 on your calculation.

With compound interest, it is £1 * [1.05 ^ 25] = £3.37

Yes, but only a fraction of the amount owing is compounded to 25 years. The rest is paid off before that.
For an annual rate of A%, the monthly multiplier is
r = 1 + A/1200
For n months and an initial loan of L, the monthly payment is:

m = L * r^n * (r - 1) / (r^n-1)

This is paid n times and as a proportion of the loan is:

m/L = n * r^n * (r - 1) / (r^n-1)

Do this with A=5% and n=300 (25 years) the ratio is
1.75.
So you'd pay back £1.75 for every £1 borrowed.

Quicker approximation is to say 5% for about 12 years, which gives £1.79 per £1 borrowed.

golfiematt

ah right its that simple ! lol:j

Cazz

tomstickland wrote: »

Yes, but only a fraction of the amount owing is compounded to 25 years. The rest is paid off before that.
For an annual rate of A%, the monthly multiplier is
r = 1 + A/1200
For n months and an initial loan of L, the monthly payment is:

m = L * r^n * (r - 1) / (r^n-1)

This is paid n times and as a proportion of the loan is:

m/L = n * r^n * (r - 1) / (r^n-1)

Do this with A=5% and n=300 (25 years) the ratio is
1.75.
So you'd pay back £1.75 for every £1 borrowed.

Quicker approximation is to say 5% for about 12 years, which gives £1.79 per £1 borrowed.

Now I know where I've been going wrong all these years :rotfl:

DVardysShadow

tomstickland wrote: »

Yes, but only a fraction of the amount owing is compounded to 25 years. The rest is paid off before that.
For an annual rate of A%, the monthly multiplier is
r = 1 + A/1200
For n months and an initial loan of L, the monthly payment is:

m = L * r^n * (r - 1) / (r^n-1)

This is paid n times and as a proportion of the loan is:

m/L = n * r^n * (r - 1) / (r^n-1)

Do this with A=5% and n=300 (25 years) the ratio is
1.75.
So you'd pay back £1.75 for every £1 borrowed.

Quicker approximation is to say 5% for about 12 years, which gives £1.79 per £1 borrowed.

Or it could be interest only, in which case my calcs stand .

Actually, if you go overpaying and move from house to house, always having a mortgage, even if it is repayment, that first £1 could be working for you for 40 years.

littlemrtinkle

Also worth noting what you would have had in terms of compound interest if you put the overpayment money in a savings account

I think the mortgage calcs fudge the figure because they save you will save x amount on mortgage interest without including what amount you would of got by saving.

Obviously in the current climate if you have a tracker mortgage you would be better off saving, but if you are unlucky enough to be stuck on a fixed rate mortgage i would overpay which is what i am doing.

tomstickland

littlemrtinkle wrote: »

Also worth noting what you would have had in terms of compound interest if you put the overpayment money in a savings account

A mortgage can split into a loan with annual interest and a savings account with the same rate of interest. The monthly payments are adjusted so that by the end of the mortgage the savings account contains the correct amount to pay off the loan.

For the same rate of interest, overpaying the mortgage or putting it into a savings account are the same thing.