Interest rate pain.

Paul_Herring

RabbitMad wrote: »

If interest rates go up 1% from 5% to 6% then on an interest only mortgage the repayments increase by 20%

Simple mathematics and applies to anyone with one of these - the whole payment is paying off interest (and no principle,) so 1% on 5%->6% is 1%/5% = 20%

where as on a repayment mortgage they only increase by 9%

.. for you maybe.

lisyloo

I'd say fact - the following is essentially what you asked for:

1% x £50,000 = increase of £500 per year
1% x £100,000 = £1,000 per year

3% x £50,000 = £1,500 per year

5% x £100,000 = £5,000 per year

This is for an INTEREST ONLY mortgage.
The figures are quite different for a repayment mortgage.

I ahve a maths degree so I personally have no problem with it, but my observations (of being on these boards daily for about 5 years) is that many people do not understand the basics about how repayment mortgages work.

There are a lot of urban myths going round about interest being front loaded etc.

I think it's going too far to say that a large proportion of the population shouldn't have homes unless they understand the intricacies of the maths. They should be able to get proper advice.
The proplem is that there are too many irresponsible lenders and advisors out there who want their commission who simply don't do what is in the customers interests.
We should be able to reply on them but we can't.

thesaint

Uncle Rico and the people that thanked him may be feeling a little silly with the post saying that it's basic mathematics.:embarasse

Melissa177

Taking out a mortgage is gambling.

If you're taking out a fixed rate mortgage, you're betting that the rate isn't going to go down.

If you're taking out a variable rate, you're betting it's not going to go up.

As with any gamble, you want to work out the odds beforehand to understand whether what you're doing makes sense. So anyone who has a variable rate mortgage should have, in the first place, used an online calculator to work out what kind of interest rates would cause them serious hurt - then they could think about how likely this is to happen!

RabbitMad

Paul_Herring wrote: »

I'd say fact - the following is essentially what you asked for:

1% x £50,000 = increase of £500 per year
1% x £100,000 = £1,000 per year

3% x £50,000 = £1,500 per year

5% x £100,000 = £5,000 per year

Am I being really think here or not?

I divide your increase of 500 per year by 12 to work out the additional monthly repayment which gives £41.67.

However when I use excel to work out the monthly amount I get a different figure:
=50000*1.01^(1/12)-50000 = 41.47

when I do it for a 5% to 6% change I get an increase of just £39.67

Is this like the difference between savings interest being paid yearly or monthly (AER vs APR)?

If so I would challange anybody who calls this basic maths.

pollyanna24

I have no idea how to work out the whole repayment thing. I just go on to various websites and they tell me what the repayment is going to be at various interest rates.

I have a fixed rate of 4.59% till next April. I have looked to see what my mortgage would cost at 10% and it is just about doable on the wages we are on at the moment. Depressing as we would be saving nothing, but at least we would still have the house I guess.

cupid_s

If mortgage rates were 10% then I'd pay off my mortgage 5 months later than anticipated.

Paul_Herring

RabbitMad wrote: »

Am I being really think here or not?

No - it's me. Both your post and lisyloo's jogged me.

Is this like the difference between savings interest being paid yearly or monthly (AER vs APR)?

Erm - sorta, in that over the year, the principle changes on the repayment mortgage. Which is what I failed to take into account in my previous messages.

Thinking aloud, and lisyloo will put me straight if I go astray I hope...

On two £100k mortgages (with £100k principle in month 1,) one repayment, one interest only:

A 1% increase from 5%->6% will have the same effect on the 'first month's' payments - an increase of 20% in the interest component of the repayment.

So in the first month, the repayment on both increases by £83.33. So the lender will increase the monthly payments by a certain amount. For interest only I believe (lisyloo?) that the increase will be £83.33, but for the repayment mortgage something else happens which I think will change the increased amount....

The principle on the repayment mortgage has reduced with the payment in the first month, so the interest will reduce (from the first month's) in line. Assuming the monthly repayments are the same from month to month (after a change in interest rates) the difference in month 1's interest and month's 2 will go to paying of a bit of extra principle.

So by the end of a year, the repayment mortgage has less principle, and as each month goes by, a higher percentage of each payment goes towards paying off the principle and less on interest.

Since a flat increase of £83.33 on the repayment mortgage would result in the mortgage being paid off early (since in every month after the first month the interest would be less than this and extra principle would be paid off) the lender recalculates a lower figure that will result in the term of the mortgage being the same as before the increase.



Apologies for my shortsightedness on what I thought was an easy calculate, and thanks to lisyloo and Rabbit for handing me my glasses

doitmyself

Basic arithmetic

Generali

Melissa177 wrote: »

Taking out a mortgage is gambling.

If you're taking out a fixed rate mortgage, you're betting that the rate isn't going to go down.

If you're taking out a variable rate, you're betting it's not going to go up.

As with any gamble, you want to work out the odds beforehand to understand whether what you're doing makes sense. So anyone who has a variable rate mortgage should have, in the first place, used an online calculator to work out what kind of interest rates would cause them serious hurt - then they could think about how likely this is to happen!

The problem is actually calculating those odds. It's impossible to know what the economy will be like in 2 years time let alone 20.

Who'd have thought that the Chinese would be selling clothes so cheaply to Tescos that I could buy all the clothes my baby son needed to go into 6-9 month old stuff for 1 hour's gross pay when the tanks were rolling into Tiananmen Square for example?