Are my mortgage payments correct?

Danno81

Hi everyone,

This is my first post as I signed up to ask this, so apologies if I do anything noobish!

I was checking our mortgage balance as reported on Credit Expert and i was surprised with how little we are paying off. We are paying around £700 a month for a 21 years. With the base rate at 0.5% and our mortgage rate variable I could understand the amonut being paid off the total mortgage would fluctuate, but the ratio of interest to balance deductions seems way off.

My partner and myself are both names on the mortgage and we both have excellant credit ratings (mine's 978, so not a perfect 1000 but still in the excellant bracket). It's a 21 year mortgage and we paid a full 25% deposit. This wasn't any sort of high interest deal and it was apparently a very good rate that our FA obtained for us.

At an average of around £270 taken off of our balance a month it would take 40 years to pay off, not the 21 years it should.

My question really is, are we being completely ripped off or are they playing some sort of numbers game where we pay most of the interest off t the start of the mortgage (I would very much begrudge paying interest now for a loan we effectively may still be borrowing in the future)?

Our month on month balance is below.

This is month on month up to 03/06/2012 (most recent first)

Balance

£126,953

£127,198

£127,456

£127,700

£128,026

£128,322

£128,615

£138,894

£139,150

£139,421

£139,770

Difference

-£245

-£258

-£244

-£326

-£306

-£293

-£10279 (We paid an extra 10k into the mortgage at this point)

-£256

-£271

-£349

Thanks in advance for any advice or ideas you may have.

Kind regards,

Dan.

Wh05apk

That looks about right, in the early years you pay far more interest than capital, as the balance decreases, the amount of interest decreases, and the amount of capital repaid increases so the balance reduces ar quicker.

Dave_Ham

In your mortgage paperwork there will be a table that shows you exactly what gets repaid and what is interest year by year.

Essentially, banks realise that nowadays people chop and change their mortgages. Whatever spin they put on it, this is there way to load the interest to ensure a decent return.

This is why people on here talk about overpayments being so, so crucial (if affordable) as a fraction extra (specifically at the moment) makes a huge difference in reducing the term of your mortgage.

JimmyTheWig

Danno81 wrote: »

With the base rate at 0.5% and our mortgage rate variable

Ok, firstly - a low base rate doesn't necessarily mean low interest rate on your mortgage.

My partner and myself are both names on the mortgage and we both have excellant credit ratings (mine's 978, so not a perfect 1000 but still in the excellant bracket). It's a 21 year mortgage and we paid a full 25% deposit.

None of this is relevant as to how much of your monthly payment will be interest.

At an average of around £270 taken off of our balance a month it would take 40 years to pay off, not the 21 years it should.

Ah, this is the bit where you are wrong.
You pay interest on the outstanding balance at the time. So currently you're paying £430 a month interest, leaving £270 a month to be taken off the capital. By the end of the mortgage you will be paying almost no interest, as your balance will be tiny. In the last month of your mortgage, for example, your balance may be £698. Interest on that will be £2 and £698 of your £700 payment will come off the balance.
So over the term, average repayments will be around the average of £270 and £700, which is £485. Which would pay off the mortgage in just over 21 years. That's a very rough calculation, so the real answer is probably exactly the same as you have been told.

My question really is, are we being completely ripped off or are they playing some sort of numbers game where we pay most of the interest off t the start of the mortgage (I would very much begrudge paying interest now for a loan we effectively may still be borrowing in the future)?

Neither, really. Certainly not being ripped off.
You pay more interest at the start because your balance is higher at the start. You are not paying any future interest now, so nothing to begrudge.


Find out the interest rate you are being charged. (Does this match what you were told?)
Multiply this by your current balance to see the interest you would be charged in a year.
Divide this by 12 to see the interest you should be charged in a month.
Does this then match up with the interest you are being charged each month?

Danno81

I pasted in a nice table which looked ok in the comment editor for the mortgage balance and difference. It did not come out ok!

JimmyTheWig

It's fine, Dan. We can read it!

Wh05apk

Dave_Ham wrote: »

In your mortgage paperwork there will be a table that shows you exactly what gets repaid and what is interest year by year.

.

You will normally only get this if a quote is produced from a brokers sourcing system, lenders KFI's do not show this information.

Danno81

Thank you for the information. That makes a lot of sense. We have a 10% of the outstanding balance a year cap for overpayments. We intend to use it! We paid off a 10K lump only a few months after we started so that was a good move I think. Come next year and (hopefully) bonus time I know where the whole lot is going!

Thank again, it makes complete sense so I feel a little dumb now asking in the first place. I think my irrational side (which really comes out to play only rarely) screamed alarms after realising our outgoings were making relatively little headway at the moment.

GMS

Try the numbers in this

http://www.calculator.net/mortgage-calculator-uk.html

As has been said the early days will be more interest than capital with the opposite true at the back end.

Danno81

Even if my first question was misplaced, it has made me more determined to pay off the maximum 10% every year.

I aways knew it was better off the mortgage than in savings. It appears especially true early on in the mortgages life.

Dave_Ham

Wh05apk wrote: »

You will normally only get this if a quote is produced from a brokers sourcing system, lenders KFI's do not show this information.

Agreed, some lenders have the table included in the KFI though although it seems a mismatch when, why or how.

Sorry off topic, pleased you are overpaying and as you say this has increased your motivation.

All the best