Do homeowners lose out on high interest vs repayment in early years of mortgage?

Wantaflat

Hi all you mortgage savvies,

I've just looked at an amortisation table and seen that the % of interest paid at beginning of mortgage is v high vs repayment. If say buyer's circumstances change and they decide to sell property instead of renting out or remortgaging after a few years of taking out the mortgage, does this mean they'll have essentially lost money to the lender considering a higher % of their monthly payments was just interest and not capital repayment?

I'm trying to understand what people stand to lose if/when they don't end up keeping the property until they've paid off the entire mortgage.

Does the amortisation schedule vary per lender or is it standard across all UK lenders, i.e. is the ratio of interest vs repayment vary per lender?

Please note this is not a question about whether or not I should buy with intention to sell in the short-term - I'm not planning to but would like to understand the potential pitfalls, in particular relating to the mortgage loan and interests, should I end up doing so. Thanks in advance!

CLAPTON

the monthly interest is worked out on how much you owe at any time and the interest rate


so if you happen to owe 100,000 and are paying 3% pa
then this months interest is

100,000 x 3% /12

it doesn't matter whether you have a brand new mortgage or have had it for 10 years
it all depend upon how much you owe this month and the interest rate

Thrugelmir

Factoring in the cost of purchase. Buying a property should be viewed as a long term purchase. So established employment for example is advisable.

Over 25 years the amount of interest you'll pay is considerable. So the less you borrow or the quicker you repay the debt makes an enormous difference.

John424

It certainly the case on all repayment mortgages that the capital paid off in the early years is miniscle to the later years in quite a depressing way.It only takes off after about 15 years into a 25 year mortgage imo. I guess it's similiar then in effect to the accumulator effect for savings but in reverse!

Wantaflat

CLAPTON wrote: »

it doesn't matter whether you have a brand new mortgage or have had it for 10 years
it all depend upon how much you owe this month and the interest rate

Thanks for your reply but I'm not sure I expressed my question well enough... according to the below amortisation calculator, there is a considerable difference in the make-up of the monthly repayments at different parts of the mortgage's lifecycle; in the early days a higher % of the monthly repayments goes towards the interest, at the later days of the mortgage more of the repayment goes towards the principal.

My question is then that in the early days of a mortgage, are you essentially paying interest and not paying off much of the property value? Does it then only make sense to repay quicker (let's ignore overpayment charges for now) or stick to the deal till the end to avoid giving the lender lots of money in interest while you end up with very little actual equity?

It may just be that this is one of the cons of having a mortgage but I was just looking to understand that. Sorry if my post is a bit convoluted...

amortisation calculator for the early days:

Month Balance Principal Interest Paid Total Int.
1 £203,206 £294 £677 £970 £677
2 £202,912 £295 £676 £1,941 £1,352
3 £202,616 £296 £675 £2,911 £2,027
4 £202,319 £297 £674 £3,881 £2,701
5 £202,022 £298 £673 £4,852 £3,373
6 £201,723 £299 £672 £5,822 £4,045
7 £201,423 £300 £671 £6,793 £4,716
8 £201,123 £301 £670 £7,763 £5,386
9 £200,821 £302 £669 £8,733 £6,054
10 £200,518 £303 £668 £9,704 £6,722
11 £200,215 £304 £667 £10,674 £7,389
12 £199,910 £305 £666 £11,644 £8,054

end of mortgage:

351 £8,590 £939 £32 £340,599 £145,689
352 £7,648 £942 £29 £341,569 £145,717
353 £6,703 £945 £25 £342,540 £145,743
354 £5,755 £948 £22 £343,510 £145,765
355 £4,804 £951 £19 £344,480 £145,784
356 £3,849 £954 £16 £345,451 £145,800
357 £2,892 £958 £13 £346,421 £145,813
358 £1,931 £961 £10 £347,391 £145,823
359 £967 £964 £6 £348,362 £145,829
360 £0 £967 £3 £349,332 £145,832

kingstreet

You only pay interest on what you owe. More of your payment is interest in the early years because you still owe most of what you borrowed.

Later, when you have repaid more, the interest element is lower and you then repay more capital from the same monthly payment.

Wantaflat

Btw, I used this amortisation calculator in my last post: http://www.abacusfinance.co.uk/repayment-calculator.php

I'd also be curious to know whether the ratio between interest and repayment is standard across all UK lenders. For example, if you have a mortgage with HSBC is the interest-capital repayment ratio across the lifetime of the mortgage the same as what it would be for a Nationwide mortgage, all other things equal?

kingstreet

Annual, monthly or daily interest calculation will impact the repayment mortgage schedule. In most cases, the schedule works in a similar way. The monthly payment calculated will repay the mortgage at the end of the term provided;-

the interest rate remains constant
the monthly payment is paid in full and on-time.

If you want to, you can calculate the interest element of the payment by taking;-

mortgage amount (£100,000)
mortgage percentage rate (5%)
divide by twelve.

For example, a £100,000 mortgage over 25 years at 5% would see a capital & interest monthly payment of £584.59.

The interest element is £100,000 x 5% = £5,000 / 12 = £416.66.

So, (approximately) in year one, you will pay £584.59 per month with interest of £416.66 per month. The difference, £167.93 sees the capital owed reduced, totalling £2,015.16 in that year.

The following year, you owe £97,984.84. The capital and interest payment remains at £584.59 per month, but the interest element falls slightly, so the capital element increases slightly.

And so on...

Wantaflat

kingstreet wrote: »

Annual, monthly or daily interest calculation will impact the repayment mortgage schedule. In most cases, the schedule works in a similar way. The monthly payment calculated will repay the mortgage at the end of the term provided;-

the interest rate remains constant
the monthly payment is paid in full and on-time.

If you want to, you can calculate the interest element of the payment by taking;-

mortgage amount (£100,000)
mortgage percentage rate (5%)
divide by twelve.

For example, a £100,000 mortgage over 25 years at 5% would see a capital & interest monthly payment of £584.59.

The interest element is £100,000 x 5% = £5,000 / 12 = £416.66.

So, (approximately) in year one, you will pay £584.59 per month with interest of £416.66 per month. The difference, £167.93 sees the capital owed reduced, totalling £2,015.16 in that year.

The following year, you owe £97,984.84. The capital and interest payment remains at £584.59 per month, but the interest element falls slightly, so the capital element increases slightly.

And so on...

Extremely helpful, thank you so much!!

I have another question if you don't mind... London & Country scouted the market to come up with "the best mortgage deal", a 5-year fixed mortgage with Skipton at 3.94% on a 30-year, 85% LTV mortgage, with application fee of £190 and completion fee of £800 which is built into the monthly repayments. It reverts to their variable rate which is 5.49% at present (rip off imo considering BoE rate of 0.5% which can only stay the same or be higher in 5 years' time). 10% total loan is allowed to be overpaid each year w/o penalty.

This contrasts with what I found myself through Nationwide who offer 3.99%, product fee of £400 which may or may not be built into the mortgage, plus £99 booking fee. Their variable rate is currently 3.99% but overpayment is fixed at £500 per month and theirs includes valuation and conveyancing fees, unlike Skipton's.

In the short term I think Nationwide does better but I feel there isn't a huge difference between the two, in the long term Nationwide beats Skipton with £1.72 vs £1.94 repaid on each £1 borrowed but Skipton's overpayment allowance is more attractive - does it make sense to go with a lender whose interest rates will go up considerably after fixed period (like Skipton in this case) in the hope of a better deal after this period or should you think longer term and go with the one whose rates are likely to be lower post fixed period, based on what their rates are now?

kingstreet

I can't answer that. Only you can decide on your priorities.

The follow-on rate is important if, for any reason, you can't remortgage at the end of the current offer, or your lender's customer retention products are not attractive to you.

Lenders' standard rates are nothing to do with the BoE base rate. They cannot borrow at that rate, they use either retail funding and mostly have to pay more than that, or they use the money markets, again at higher rates.

Even lenders taking advantage of FLS (Funding For Lending) are paying more than that, more like 0.75%. That only applies to new lending too...

Thrugelmir

Wantaflat wrote: »

(rip off imo considering BoE rate of 0.5% which can only stay the same or be higher in 5 years' time).

BOE doesn't fund mortgages.

Retail savers do.