Debit interest confusion

GMS

In the early years of a repayment mortgage the majority of the monthly payment is interest. As the balance reduces gradually so does the interest charged upon it.

Monthly payments are worked out so that the debt is cleared at term end assuming all payments have been made.

For instance, payment 1 of say £500 may include £480 of interest. The last payment of £500 could be £20 interest, and £480 capital.

If your interest is being applied every 3 months you will notice a leap in outstanding balance when it is applied. If it was done monthly you would see a gradual reduction every month.

Keep doing what you are doing and do not worry too much about it.

Keep an eye on interest rates and if you feel like you want to fix at any point have a look at what is available.

modelreject

A final thank you to you all. Been immense help!!!!

modelreject

"For instance, payment 1 of say £500 may include £480 of interest. The last payment of £500 could be £20 interest, and £480 capital."

Sorry, just one more. If I am paying interest through the payment of £514 why do I pay the £800 payment. The total I am meant to repay is £154,200 and this is 514x12x25.

Thanks again.

GMS

Your interest looks like it is being applied every 3 months rather than monthly, so if you divided it by 3 you would get a rough monthly figure.

You would repay the total amount shown on your offer if rates stayed the same as the offer.

The £811.93 applied in debit interest looks to be throwing you a bit.

You had interest added at end of June, next interest added end of September.

If interest was applied each month it would be roughly £270.64 (depending on days in month) but that is 3 months divided by 3.

If you have interest added 4 times in the year it would be approx £3247. Total paid would be approx £6168 so you would reduce balance by around £2900 without any overpayments.

modelreject

Mmmm. I think I am being a wee bit stupid here.

I thought that the bank got their interest from my £514 monthly payment. I borrowed £108,000, but have to pay back around £154,000. the extra £46,000 was the interest?

So I am paying approx £3247 extra this year. What is this interest? I assume I will be paying another £30,000 or so on top of the £154,000?

Sorry for being such a noob.

Thanks again for all your help.

TrickyDicky101

Your 514s are reducing the balance you owe, the debit interest (811.93 on 30/9/2010) is increasing your balance. So you are correct, the 514 monthly payments do indeed represent a repayment of both capital + interest.

modelreject

Again, I don't quite understand why I am paying interest twice.

"514 monthly payments do indeed represent a repayment of both capital + interest." yet I am paying over £800 each quarter in interest.

Not quite getting that bit lol

andys15

modelreject wrote: »

Again, I don't quite understand why I am paying interest twice.

"514 monthly payments do indeed represent a repayment of both capital + interest." yet I am paying over £800 each quarter in interest.

Not quite getting that bit lol

Divide your £800 by 3 = £266. Therefore out of your £514, £216 goes to interest, £298 goes to capital. Which actually looks wrong as I would assume you would pay more interest. My mortgage is £1284 and I currently pay over 1K interest per month.

modelreject

Well explained andys15. Just what I was looking for. I'm out of here. Thanks for all the help. Promise I won't have any more questions on this thread. :T

GMS

modelreject wrote: »

Again, I don't quite understand why I am paying interest twice.

"514 monthly payments do indeed represent a repayment of both capital + interest." yet I am paying over £800 each quarter in interest.

Not quite getting that bit lol

Your payments of £514 are taken each month. The interest is being applied every 3 months.

You are not having interest added to the account at the same time as payments are made.

Ignore the £800 as a stand alone figure. You are NOT paying this as an additional interest.

Times the £800 ish by 4 to get a rough annual interest figure. Then times payments by 12 to get annual repayment figure.

The difference is what you have reduced balance by (in theory)