Repayment Mortgage Interest Loading?

odgeuk

So someone was telling me the other day that if you have a repayment mortgage, the first years of the mortgage you pay more interest than capital. As the time passes, you being to proportionately pay more capital in your monthly payments. This woudl suggest that the repayment mortage is typically 'loaded' so you pay back the interest before the captital?

Is this true?

I have a 25yr Repayment Mortgage which now has about 19yrs left to run. Is it really true that for the time passed so far I might only have paid back mostly interest? How does this work? How can you be charged interest for borrowing money over a time period when that time period has not yet completed?

Perhaps someone could clarify this for me. In my mind, if this was true, then selling your house early on in a repayment mortgage would suggest that you've mostly paid off interest on a time frame of 25years (even though you hadn't borrowed the money for that long) ?

Confused of Worthing....

PS: If this WAS true then, unless you were certain you were going to see the full term of the mortgage through before moving and paying it back, surely it would always be preferable to have an interest only mortgage and save the capital repayment into another account.

Thrugelmir

Very simply you pay interest on the money you borrow.

Here's an example of borrowing a £100k over 25 years at 5%. Monthly repayments of £585.

2nd column is interest, third is capital.

1 $100,000 $4,953.17 $2,061.91 $97,938.09
2 $97,938.09 $4,847.68 $2,167.40 $95,770.70
3 $95,770.70 $4,736.79 $2,278.29 $93,492.41
4 $93,492.41 $4,620.23 $2,394.85 $91,097.56
5 $91,097.56 $4,497.71 $2,517.37 $88,580.19
6 $88,580.19 $4,368.91 $2,646.17 $85,934.02
7 $85,934.02 $4,233.53 $2,781.55 $83,152.47
8 $83,152.47 $4,091.22 $2,923.86 $80,228.62
9 $80,228.62 $3,941.63 $3,073.45 $77,155.17
10 $77,155.17 $3,784.39 $3,230.69 $73,924.48
11 $73,924.48 $3,619.10 $3,395.98 $70,528.50
12 $70,528.50 $3,445.36 $3,569.72 $66,958.77
13 $66,958.77 $3,262.72 $3,752.36 $63,206.41
14 $63,206.41 $3,070.74 $3,944.34 $59,262.07
15 $59,262.07 $2,868.94 $4,146.14 $55,115.94
16 $55,115.94 $2,656.82 $4,358.26 $50,757.68
17 $50,757.68 $2,433.84 $4,581.24 $46,176.44
18 $46,176.44 $2,199.46 $4,815.62 $41,360.82
19 $41,360.82 $1,953.08 $5,062.00 $36,298.82
20 $36,298.82 $1,694.10 $5,320.98 $30,977.84
21 $30,977.84 $1,421.87 $5,593.21 $25,384.63
22 $25,384.63 $1,135.71 $5,879.37 $19,505.26
23 $19,505.26 $834.91 $6,180.17 $13,325.09
24 $13,325.09 $518.72 $6,496.36 $6,828.73
25 $6,828.73 $186.35 $6,828.73 -$0.00


As you can see until year 13 you are paying more interest than capital still.

magpiecottage

It is quite true. The payments are set up so that you will pay the same amount over the entire term, assuming the interest rate does not change. So in month 1 you will pay almost entirely interest with a small amount paid off the loan.

In month 2 you will owe slightly less, so the interest will be lower but the payment is the same and you will pay a tiny bit more off the loan.

In month 3 the loan has gone down a bit more so the interest is lower again and more is paid off the loan.

Over the last couple of years most of the payment will be capital and very little interest.

The figures are recalculated over the rest of the mortgage term every time the interest rate changes but the principle still holds.


You could, in theory, invest the money to repay it from something else but to be worthwhile the return would need to exceed the interest paid. Since you would need to find the money to pay the interest and to invest from taxed income and growth in it would be liable to some taxation as well, it will be hard to achieve that - it was, in the end, the downfall of endowment mortgages.

SalsaDanca

You are correct that when you have a repayment mortgage, the first payments are mostly interest. As you repay, the proportion of interest goes down and more of your monthly payment is used to repay the capital. However, this isn't because the bank is ripping you off or "loading" your interest. Quite simply, at the start of your mortgage you have to pay lots of interest because you owe an awful lot of money.

For example, here are some figures for a 25-year mortgage of £200,000 at 5%, assuming that the interest rate never changes. A simple online calculator shows the repayment will be £1,182 per month. In the first month of the mortgage, the interest will be £833, leaving only £349 to pay off the mortgage. In the last month, there will only be a few pounds of interest, and almost the whole payment would be used to reduce the debt.

If you wanted to spread your capital repayments equally over the term of the mortgage, you would have to pay £666 capital every month. The first month your payment would be £666 + £833 interest = £1,499, and the last payment would be £666 + just a few pounds of interest. Most people couldn't afford such large payments when they've just bought their home, so paying off less capital at the start makes the mortgage affordable even though it costs more in the long run. People who can afford to overpay their mortgage in the early years can save themselves a lot of interest.

odgeuk

Thank you very much. Great answers. It's much clearer now.

They need to teach this stuff in schools.