16 years paying £42,500 mortgage – only £4,000 paid off it!

HelpWhereIcan

EdInvestor is correct and the effect of a prolonged period of high interest rates cannot be overestimated.

However, I do not think that it will be all there is to it in this case.

Even assuming an interest rate of 15% from day1 to the time the mortgage was repaid, this amortisation calculator indicates that the balance in year 16 would be expected to be approx £32,000 and not the £36000 the OP experienced.

There are some problems with relying on that calculator

1. AFAIK it calculates interest daily and you cannot underestimate the effect of interest being calculated annually. However, that is probably compensated for by the fact that

2. It does not take into account how interest rates will have fallen between 1992 and 2006.

That is what makes me think that the starting balance was higher than the assumed £42,500.

The most likely explanation being an amount of fees being added to the loan at the start.

The other is that it may have been a deferred interest mortgage which were quite heavily sold at the time to those who were expecting decent income increases (in theory)in order to make the mortagge affordable in the short term and in times of high interest rates.

Obviously the figures from the OP's mortgage statemet should throw some light on this.

Tootsie_Roll

ejones999 wrote:

I don't know of any NORMAL mortgage where you original debt increases.
Either you are on a fixed rate or your monthly payment increases/decreases with interest rate movements.
I can't see here how a mortgage debt would increase!

Another point to remember is that most people were on an annual review so their mortgage payments only changed once a year. It was very, very common during the early 90's for balances to increase quite significantly as interest rates went through the roof and payments remained the same as they were at a much lower rate.

toonfish

certainly smells a like a deferred interest loan from the details provided, only the lender can give th edefinitiv eanswer if the OP doesn't know

SunshineGirl_4

EdInvestor wrote:

You guys don't understand how mortgages work at times of high inflation/high interest rates.The concept is called "front end loading" and works exactly as geo555 describes as the interest is repaid before the capital.

It was very typical after five years to have paid off only a token amount of your mortage (a tenner perhaps). You didn't start making real inroads into repaying the capital until quite near the end of the term certainly not till after 15 years.

EdInvestor/geo555 - yes it was usual for many people to only start paying capital off after 10 or 15 years. In my situation (and having looked at my first statement (1990), the interest accrued in the first year, exceeded the payments made - by over £900!

Others mentioning it was deferred interest loan - it wasn't unless I have misunderstood something. It was a straightforward repayment mortgage where payments went up and down according to interest rate changes.

Tootsie_Roll

SunshineGirl wrote:

Others mentioning it was deferred interest loan - it wasn't unless I have misunderstood something. It was a straightforward repayment mortgage where payments went up and down according to interest rate changes.

But how often did your actual repayment change ?

brasso

I'm surprised that you've only noticed this after 16 years though. Did you not looka t your annual mortage statements? I got fed up with the situation after a couple of years of not seeming to make inroads, and started to overpay the mortgage. It made a real difference to the bottom line.

regularsaver1

was there are home insurance added to the mortgage?

and when rates changed did payments only change once a year for you?

maninthestreet

Interest rates started falling once the UK crashed out of the ERM, in September 1992, so a mortgage taken out in 1990, with payments set at the beginning of each year, would have been subject to increasing mortgage rates until later 1992, then would have benefitted from falling interest rates (over 2% in either 1993, or 1994, I believe).