When do mortgage payments go down?

Horizon81

Basic mortgage question but I'm struggling to understand it...

Repayment mortgage, from the first payment the majority of the monthly payment is interest, only a tiny amount capital, but all the same, from day 1 you start to chip away at the capital. Interest is calculated on the capital owing so the interest will reduce by a tiny amount per month but your monthly payment remains the same as you pay off a tiny bit more capital - have i got that right?

So... With that in mind, when would your monthly payment reduce? I don't mean because of interest rates, I mean when is there a recalculation based on the capital owing? Say after 20 years on a 25 year mortgage for £70k you only owe £20k, surely the monthly repayment on that wouldn't be the same as it was when you first started the mortgage - or would it be??

joedenise

The payment would be the same but you'd be paying more off the capital and less interest.

Denise

GemBlueTopaz1984

Hi,

I think the monthly repayment would go down if you extended the length (assuming the interest rate was staying the same), but 20 years into a 25 year mortgage, means if you keep the term you only have 5 years to clear 20k so the payment would be the same, but alot more of your payment is clearing the balance of the mortgage.

Gem

Ransoman

It (monthly payment) wouldn't go down. The Total amount repayed is calculated (Capital + Interest) and then divided by the number of months in the term. The only time this is recalculated is when the interest rate changes or (Hopefully someone can confirm this last one) when overpayments are made to lower the capital.

somethingcorporate

The payment stays the same (assuming the rates are static). It is the balance between capital and interest that changes. The monthly value you pay is calculated to ensure that at the end of the term all capital is repaid and the monthly interest is covered.

The amount you pay does not change unless the rate does.

Horizon81

Cheers all. That's what I always thought but the more I read about mortgages the more confused I get.

It seems the only way to reduce it is to make overpayments when possible, so the overall calculation changes.

somethingcorporate

Indeed - and when you do make over-payments you get the choice as to whether the payment reduces or whether the term is reduced.

You will often find the default position with your lender is the latter (so your monthly payment does not change) so if you want to reduce your monthly payment you may need to request this when you make your over-payments.

elantan

not sure if it helps or not ... but i figured out that for every £500 i pay extra to my mortgage the interest i save is 10p per day ... i'm paying 4.69%

so effectively with every extra £500 i pay off a month i am saving £3.10 a month ( on a 31 day month obviously) in interest... eventually i will pay off my mortgage much faster than the 25 year term ( well thats the hope)

Horizon81

somethingcorporate wrote: »

Indeed - and when you do make over-payments you get the choice as to whether the payment reduces or whether the term is reduced.

You will often find the default position with your lender is the latter (so your monthly payment does not change) so if you want to reduce your monthly payment you may need to request this when you make your over-payments.

Just coming back to this post. Say my mortgage lender lets me make a maximum of 20% overpayments (of the monthly payment) per month. If I pay these 20% overpayments, but ask for my monthly payments to stay the same (i.e reduce the term) then wouldn't i have to pay Early Repayment Charges? My thinking is for each overpayment I make, the capital the interest is calculated on is reduced, so if I keep the original monthly payment AND continue to pay the 20% overpayment a month then that comes to over 20% overall and the ERCs would kick in?

katejo

Horizon81 wrote: »

Just coming back to this post. Say my mortgage lender lets me make a maximum of 20% overpayments (of the monthly payment) per month. If I pay these 20% overpayments, but ask for my monthly payments to stay the same (i.e reduce the term) then wouldn't i have to pay Early Repayment Charges? My thinking is for each overpayment I make, the capital the interest is calculated on is reduced, so if I keep the original monthly payment AND continue to pay the 20% overpayment a month then that comes to over 20% overall and the ERCs would kick in?

Yes there may be a limit on the overpayment s which you can make to ensure that you avoid the early repayment charge. It depends on the rules regarding your possible ERC.

Thrugelmir

The ERC would still to any balance owed at the point the product was exited or the mortgage repaid.