Manually calculating mortgage repayments

Busa

Can anyone tell me how I can calculate what I should be paying each month on my mortgage please? It's always stumped me how I let the bank calculate my repayments, then cough up the money each month without querying their calculations. So I'd like to understand how they come up with my monthly repayments.

If my mortgage is for £40,000 outstanding and I've 12 years left to pay and I'm now halfway through a 5 year fixed rate repayment mortgage at 3.59%, what's the calculation I have to do? Can anyone suggest an equation/alogarithm I can use to calculate my monthly repayments to make sure I'm getting charged the right amount?

thanks!

B

getmore4less

you need to look up amortization.

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

or just use one of the calculators they get close enough.
http://www.whatsthecost.com/mortgage.aspx

The amount you pay which is usually fixed is often different to the real amount required as months are not equal.

Busa

Thanks for the tip - i'll look into amortization.

I can see it'd be a pretty complex calculation. I'd be very interested to know the detail of it - though i'm guessing it'll be quite a learning curve!

getmore4less

The other thing lenders don't do is take into account future rates.

The calculation will be standalone based on the current amount outstanding the term(to the month) and the current rate.

the actual calculation will vary by lender depending on their own interest calculation(daily, monthly, yearly) and their own compounding(daily, monthly, yearly).

Daily interest, monthly compounding is quite common these days.

Each lender has their own rules on when and how often they recalculate the payment. things like(but not limited to) anniversary, rate changes, overpayments can all trigger recalculations.

amnblog

If you paid the monthly interest each month and the same amount off of the mortgage your initial payments would be much higher than you could probably afford.


Therefore the payments are weighted so that you pay off more capital as your interest load reduces. This is a complex calculation best done by actuaries (who are people who found accountancy too exciting as a career choice).


In simple terms


For example if you borrowed £300,000 over 25 years it works out at £1,000 a month. Add 3% interest in year one payments would be £1,750. The Lender reduces that capital repayment load initially to about £680 per month making payments £1,435. By the time you owe £50,000 the interest is £125 so you are repaying £1,310 capital each month.


I suspect your trying to check your lenders calculations is, with respect, a waste of your time. Lenders check, check, and recheck their calculations already or they risk falling foul of the regulator.

Busa

Thanks for that amnblog. I'm starting to think it's probably beyond my GCSE maths to calculate and would probably need some help. I've asked my mortgage provider for details of how they calculate it, but i'm not holding my breath!

It does seem a tad bizarre that a simple mortgage should be so impenetrable - that something so commonplace is beyond the wit and wisdom of the common man to check they're not being ripped off.

We all know how complex financial products obfuscate and hide errors or worse - it would be lovely to be able to self-check what is most people's largest single item of expenditure, rather than rely on banks to be honest!!!

amnblog

Nearly every provider of financial product employs people who find it is in their interest to make everything more involved and more complex.


They then bring in consultants who are paid big money to make everything more complex still.


Finally, the regulator tops it all off with reams of rules that achieve little other than adding to the complexity.

Busa

Wow - found mortgagesexposed dot com (sorry not allowed to post links yet!). Haven't checked out their spreadsheets yet but it's making all the right noises. Wish me luck!

JimmyTheWig

If you want to independently verify what the bank is telling you, just use a mortgage calculator.
MSE has one.
http://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator?_ga=1.155691899.1926917370.1404490112

JimmyTheWig

But if you are interested in how the figures actually work, you can approximate it.

Your mortgage balance today is £40,000.
Your mortgage balance at the end of the 12 years is £0.
Your average (*) mortgage balance, then, over the 12 years will be £20,000.

At 3.59% interest (**), your average annual interest will be £20,000 x 3.59% = £718.
You will pay this average interest for 12 years. So total interest will be £718 x 12 = £8,616.

So in total you need to pay back the £40,000 you owe plus the £8,616 interest. £40,000 + £8,616 = £48,616.

You will be paying this for 12 years, so each year you will pay £48,616 / 12 = £4,051.

You make 12 equal monthly payments during a year. Each of these will be £4,051 / 12 = £338.

Which is only £4 out from what the MSE calculator says.


(*) This is where the calculation is only rough. The mortgage balance doesn't reduce in a straight line. You pay more interest at first, so pay off less capital. This means that your real average balance will be a little higher than this. Which is why MSE's calculator's answer is £4 higher than mine.

(**) As getmore4less says, future rates don't come into play in the calculation. It is assumed, when working out your monthly repayment, that the interest rate you are paying now will be the interest rate that you will pay for the rest of the mortgage - even if you are on a product where you know that won't be the case.

Goldiegirl

Of course, you need to start from the same point as your lender.

That is, calculating the monthly payment on the same debt, and the same term. Each time the monthly payment is recalculated, it won't be on a nice round figure and a nice round term. It'll be the amount outstanding on on the day that the payment is calculated, and years and months to the end of the mortgage.

Years and years ago, when I worked at a big lender, we'd have people wanting us to 'prove' their mortgage payment, and we had to do a huge manual calculation to confirm it, and then type it all out in a letter for them.

There's nothing to hide with the way payments are calculated, but generally this exercise was a waste of time, as the maths was beyond most people

Incidentally, people who wanted their payments 'proved' were considered to be a real pain, as the work that was created was immense.

It's easier now, due to spreadsheets, but if the payment isn't exactly the same as your lenders, don't be surprised, as you won't be using the exact same figures as them