How is mortgage interest calculated

timdenty

OK - I've a budding first time buyer entering into the daunting world of getting a mortgage. I've been researching the whole business lately, and while the process and terminology is explained thoroughly, I'm struggling to find information on how mortgage interest is actually calculated.

So far i understand that mortgage interest is calculated by multiplying your outstanding loan balance by your interest rate?

So for arguments sake, if we took some nice round numbers of a £100,000 mortgage (first time buyer remember) payable over 25 years at a 5% annual interest rate, this would mean that £4000 would be payable every year on the capital debt and...

• In year 1 an interest figure of £5000 (5% of £100,000) would be payable over the year.
  
  
• In year 2 an interest figure of £4800 (5% of £96,000) would be payable over the year.

Could someone confirm whether I'm on the right track (or hopelessly lost) here. I'm trying to get a formula together to find out a ball-park figure of what my repayments might be per year.

Many thanks

T

jennifernil

It is more complex than that. Some Bank/BS websites have a calculator you can use to find out what your repayments would be.
Basically, unless you have an interest only loan, most of what you pay goes to cover the interest and only a little towards reducing the capital at the beginning, but the balance gradually changes and at the end it is almost all capital you are repaying.

Bernard_Coleslaw

timdenty wrote:

So for arguments sake, if we took some nice round numbers of a £100,000 mortgage (first time buyer remember) payable over 25 years at a 5% annual interest rate, this would mean that £4000 would be payable every year on the capital debt and...

• In year 1 an interest figure of £5000 (5% of £100,000) would be payable over the year.
  
  
• In year 2 an interest figure of £4800 (5% of £96,000) would be payable over the year.

Not quite - say you keep your mortgage for 25 years - £4,000 is the average amount of capital you would repay every year. But in the early years you'd pay far less then £4,000 off annually, and towards the end of your term you'd pay off far more than £4,000 in capital every year.

In other words, in the early years your capital reduces very slowly, and in later years it really comes down rapidly.

Because of the way repayment mortgages are calculated it's not that easy to work out figures yourself. If you have MS Excel, the 'Loan Amortization' feature might help, or the 'PMT' function instead.

However, the real best way of doing this is to go and get payment ideas from a professional adviser. There's always a debate about whether you should go to a lender direct, a broker, whole of market, independent, etc, and I'll leave these decisions to you.

Sounds like you're doing this with your eyes open, though, so good luck!

Mr_helpful

First you must define some variables to make it easier to set up: P = principal, the initial amount of the loan
I = the annual interest rate (from 1 to 100 percent)
L = length, the length (in years) of the loan, or at least the length over which the loan is amortized.
The following assumes a typical conventional loan where the interest is compounded monthly. First I will define two more variables to make the calculations easier:
J = monthly interest in decimal form = I / (12 x 100)
N = number of months over which loan is amortized = L x 12
Okay now for the big monthly payment (M) formula, it is:
J M = P x

---

1 - ( 1 + J ) ^ -N

timdenty

Thanks for the feedback all. This is very helpful

T

peterg1965

If you are any good at Excel you can produce a spreadsheet which shows the amount of interest levied daily and the effect of your monthly payments. Most mortgages charge daily interest these days.

Mr_helpful

There are lots of interest calculators on google

Robinhood

peterg1965 wrote:

If you are any good at Excel you can produce a spreadsheet which shows the amount of interest levied daily and the effect of your monthly payments. Most mortgages charge daily interest these days.

Does anybody have such a thing readily available that they could forward to me?