Mortgage payment confusion

lez5075

Hi all,

I was wondering if some can help clear my confusion.

I brought a flat almost 12 months ago. We took out a mortgage, fixed rate deal with ING – 2 year fixed rate deal.

The monthly payment is £475 (for the duration of two years) – 3.75% fixed rate.

After payment our initial deposit £ 40,000on the initial sum of property (£150,000 flat), leaving £110,000 which we took out mortgage.

We received our annual statement recently and it showed all the monthly payments made which is fine but there was an interest rate charge showing each month which is being added to the balance and then minus our monthly payments (£475).

Is this how fixed rate deals work? I thought you just pay the fixed agreed amount (which we are) but why is interest being applied to the remaining balance each month? The interest being added varies each months between £300 to £371 a month but why is this being added if it’s a fixed rate deal? This meaning it will take longer for us to pay off the mortgage (then the 35 years stated) ?

Hope someone is able to clear our confusion here.

Many thanks.

Lez

kingstreet

A different number of days in each month.

The lender adds the number of days interest to the outstanding capital and you make a payment to remove that addition and reduce the capital at the same time.

comeandgo

Thats how all my mortgage statements look - they take off the payment then work out the interest on the remaining balance - the interest rate is fixed but the amount of interest paid reduces each month as you slowly pay back the initial mortgage, which is called the capital element. It does look really disheartning in the first few years when you realise how little actually goes to reducing your mortage and how much goes on interest.

lez5075

So technically they are correct in what they are doing?

Kinda confusing because they only mention the fixed rate monthly repayment and I was under the impression you just minus the monthly payments from your remaining balance to find out how much is left to pay (but obviously not).

comeandgo

What they are doing is correct. They will be starting with your £110,000, then add the interest as 3.75%/365xhowever many days the month has to get your interest then take off the £475. If they were to take £475 off each month and not add on any interest you would be paid off in just over 19years.

kingstreet

The interest rate and the term are the fixed items.

The amount of capital on which the interest is calculated reduces a little each month in the early years of a very long capital & interest mortgage.

So, the balance on the last day of the month and the rate and number of days in the following month is used to calculate how much interest is due for the following month.

Your payment then comes into the account, pays the interest and a little more of the capital off and the balance is then a little bit less for the next month's calculation.

It does not work like a personal loan. If it did, it would make mortgages totally unaffordable and you'd end up with the daft system where they have to refund overpaid interest if you repaid the mortgage, perhaps when you move.

StuC75

How else were you expecting the interest to be charged to the mortgage? In the early years the Interest charged will form a higher percentage of what the monthly repayment is ( so less comes off the balance).. but in later years the split will improve..

Because you have a 35 year term this is why the balance is reducing so slowly - your KFI Document would have explained that 35 Years of £475 would have you paying £199k over that term..

dimbo61

Overpay every month.
Any overpayments will come straight off the balance
Start with £500 a month then increase the overpayment when you can afford too

Thrugelmir

lez5075 wrote: »

So technically they are correct in what they are doing?

To put matters in perspective. If the interest rate were to remain static.

Over 35 years you are going to pay over £87,000 in interest.

With 5 years remaining on the mortgage term. You'll still owe nearly £26,000 of capital.

Overpaying your mortgage by whatever you can afford will pay huge dividends.

Reducing your mortgage term by 5 years will save you over £14,000 of interest.

In the scheme of life not sums to be ignored.

tyllwyd

you might find it easier to understand if you see a mortgage amortisation schedule. If you go to whatsthecost.com, put the info into the mortgage calculator then click on the 'details' box when it gives the result, it shows the relationship between interest and capital over the term of the mortgage

lez5075

Hi,

Sorry just to add, so if the interest rate is fixed for two years on the mortgage and the term why does the interest that the lender adds on the remaining capital vary each month? Should that be fixed too?

The interest that the lender adds on the remaining capital is varying each month, goes up one month , then down and then increases again later.

Isn't it meant to go down each month? This is where I am confused.