How does the interest on a mortgage work?

Feanor

Hi,

Sorry to keep asking simple questions but this is something i dont understand.

If we borrow say £230k at 4.99%, is that 4.99% of the whole balance over 30 years? (highly unlikely i think?) or is it 4.99% a year? Which seems like alot!

I dont understand how its worked out and how we can work out what we will ultimately be paying.

Hope someone can explain!

Leon_W

In your example, 4.99% a year. Bank of England base rate is 5.25% so relatively it's not a lot !

Therefore £230,000 X 4.99% = £11477 (a years interest)

Divide by 12 = £956.41 per month.

molerat

If you borrow £230k on an interest only mortgage the payments will be iro £956 per month for the term of the loan with £230K to be repaid at the end. A repayment mortgage works differently and I am sure someone will be along soon with figures for that.

tomstickland

The rate quoted is the annual interest rate. The monthly payments are calculated so that if 1/12th of the annual rate is applied to the outstanding balance every month then over the term of the mortgage you will clear the total balance.

Feanor

So...if we took the mortgage over 30 years, thats £950 x 12 x 30 = £342,000 in interest??

Whhhaaaaaaaaaaaaaaaaaaaaat !!!!

Leon_W

You will not get 4.99 over 30 years !

The 4.99 will revert at some point to the lenders standard variable rate which would be in the order of 7.25% at the moment.

So your £342,000 is on the low side !!!

Plus don't forget, as this is an interest only guestimate. You will still owe the original capital of £230,000

So £230,000 plus say £400,000 is £630,000

Welcome to the wonderful world of mortgages !

mayb_2

Best not to think about that bit as there is no such thing as an interest free mortgage and 4.9% is about the best you are going to get right now I would think. One thing though how does this change if interest is worked out on a daily basis and does this apply to your mortgage?

Just out of interest who is the mortgage with?

molerat

A repayment mortgage at 5% over 30 years will be iro £1246 per month = £218776 in interest.

Feanor

Jeez that is scary. Sorry the 4.99 was for illustrative purposes.

I suppose working it out, we pay out 9k a year for rent which goes nowhere. So 11k interest a year isn't too bad, and hopefully we will buy well and get something that will keep its value!

Thanks for setting the record straight x

Phew

ohmsoft

Really scary and stresses the importance of trying to pay off asap!!

To cushion the impact remember with inflation £630K will be worth a fair amount less in 30 years (but no doubt still a dent in the wallet!)

tomstickland

Feanor wrote: »

So...if we took the mortgage over 30 years, thats £950 x 12 x 30 = £342,000 in interest??

Whhhaaaaaaaaaaaaaaaaaaaaat !!!!

No, the maths is a bit more involving than that since it involves compound interest on a diminishing borrowed amount.

A 4.5% mortgage over 25 years incurs about 80% of the original loan amount in interest charges.