how do lenders calculate the capital and interest on monthly payments?

RickyJ

I've been looking for re-mortgage deals on a fixed repayment. During my search I've got lots of key fact information from lenders which show monthly payments.

On these repayment mortgages how do lenders calculate the capital and interest on monthly payments?

Thanks

ACG

http://www.learnmoney.co.uk/mortgages/repayment.html
Have a read of that, i think its quite a good explanation.

Consumerist

RickyJ wrote: »

. . . On these repayment mortgages how do lenders calculate the capital and interest on monthly payments?

In simple terms, the monthly interest charge translates to roughly one-twelfth of the loan's STRIKE]APR[/STRIKE "gross" interest rate. In any given month, the difference between the monthly repayment and the monthly interest charge is the capital repayment in that month.

Since the outstanding balance reduces over the term, the monthly interest charge will also reduce. This means the monthly capital repayment will gradually increase over the term until the final repayment is nearly all capital repayment.

Edit
As an example, consider an outstanding balance of £100,000 on a loan at 6% STRIKE]APR[/STRIKE gross pa with a monthly repayment of £700.00

6% STRIKE]APR[/STRIKE gross pa translates roughly to 0.5% monthly and 0.5% of £100,000 = £500 monthly interest charge.

So the capital repayment is £700 - £500 = £200

The outstanding balance in the following month will be reduced by £200 to £99,800

kingstreet

Consumerist - it uses the actual rate, not the APR.

If the APR was used, interest would be charged on any fees which have been paid and on the notional follow-on rate which is assumed for the remainder of the term, once any initial rate is over.

For example, I have a KFI here for a Nationwide 3.38% fix for five years. It is this 3.38% which on which interest and capital repayments are calculated.

The interest payable in year one is £3,970 and the capital reduction £3,468. This is based on a £118.700 mortgage over 23 years, with a monthly payment of £619.88.

The APR, which includes the other things mentioned earlier, is 3.8%.

Goldiegirl

There's a formula that they use - you can ask your lender for it if you like.

A level maths is also helpful

Consumerist

kingstreet wrote: »

Consumerist - it uses the actual rate, not the APR.

Thanks kingstreet. You are, of course, absolutely right. I was just trying to keep it simple (and it was past my bedtime ).

Edit
I think the rate required is referred to as the "gross" rate of the loan but then we get into confusion between "gross" and "net" which has no bearing on this issue.

I've modified my original response to reflect your comment. Thanks again.

getmore4less

The term you need is Amortization

http://en.wikipedia.org/wiki/Amortization_calculator

Consumerist

getmore4less wrote: »

The term you need is Amortization
http://en.wikipedia.org/wiki/Amortization_calculator

That link tells tells you everything and yet nothing.

This is how banks like to answer such questions in the secure knowledge that few will understand the answer. .

Zero_Sum

I've got a spreadsheet that shows the capital/interest split in your mortgage payments. It may be of some help
http://zerosum.freewebspace.com/

kingstreet

Consumerist wrote: »

Thanks kingstreet. You are, of course, absolutely right. I was just trying to keep it simple (and it was past my bedtime ).

Edit
I think the rate required is referred to as the "gross" rate of the loan but then we get into confusion between "gross" and "net" which has no bearing on this issue.

I've modified my original response to reflect your comment. Thanks again.

I couldn't think of a term. Notional rate, perhaps?