Changing the term - effect on interest/capital repayments

tyllwyd

We're five years into a 15 year mortgage, and our payments are pretty high (£1200 per month).

We are far enough into the term that our payments are at last more towards the capital than interest (£500 interest & £700 capital).

I thought about extending the term to bring down the monthly payment, but I worried that it would reset the relationship between interest and capital (ie that if it reduced the monthly payment to £800 per month, the repayment mortgage would start off again as £800 interest & £0 capital). Does anyone know if that is right? If we made overpayments, or reduced the term, how does that affect the relationship between interest & capital?

(edited to say - hope this is the right board, I thought you MFW guys would understand the effect of changing an existing mortgage best.)

alex_p

I don't think that is right way to think about it. The way the mortgage is worked out is to a standard formula. You don't need to think about capital/interest ratios. It doesn't matter.

It's simple, if you can make overpayments then do it, because that will reduce the principal amount owed straight away thereby reducing the interest charged and lowering your monthly payments. Reducing the term has the same effect except your monthly payments will go up.

If you cannot afford the current monthly payments then you need to lenghthen the term however that will increase the interest you will pay overall by quite alot. It is worth wacking in the mortgage formula in a spreadsheet and playing with the numbers.

The formula is:

P = L[c(1 + c)n]/[(1 + c)n-1]

Where:
P = Monthly payment
L = Mortgage amount
n = Number of months (multiply years by 12)
c = Monthly interest rate (divide interest rate by 12)

Or you can use a mortgage calculator available online if you're not too hot on maths!

tyllwyd

alex_p wrote: »

I don't think that is right way to think about it. The way the mortgage is worked out is to a standard formula. You don't need to think about capital/interest ratios. It doesn't matter.

Well, it sort of does matter to us at the moment, because we are thinking about moving later this year and downsizing. So if we carry on as we are, our mortgage balance reduces by £700 every month, but if we extend the term to bring down payments until we move, we wont be paying anything at all towards the capital, it will all be interest. Do you see what I am trying to say?

alex_p

OK - I see your point. It is clear that if you increase the term then you will pay less per month and the capital will decrease slower.