Understanding the Interest on the Mortgage

orsm

Hi,

Could someone please explain the following,

My wife took out a Mortgage and we moved into our home Feb 2014

The mortgage is 3.84% 3 year fixed rate

She got her end of year statement and the following summary

Opening balance as of 01 Jan 2014
Advances £148750
Total Interest £5196.36

Less
Payments received £7683.67 (Feb payment £718.67, then 10 payments of £696.50)

Closing balance as at 31st Dec 2014
£146.262.69

So basically in the whole year only £2487.31 has been paid off the mortgage.

my question is where and how do they get the Total Interest £5196.36 from, is it added on at the start of the Mortgage for the first year. Will there be another chunk of interest added on for this year ?

At the bottom of the statement it states

From Feb 2015 your monthly payment calculated at 3.84% will be
Basic mortgage payment £696.50

Thats the amount we have paid all the way through 2014 too.

Kind regards

Jeff

chanz4

if its a repayment, part of the payment is intrest and part capital. the figure above it the capital.

getmore4less

Read up amortization.

The interest on £148750 @ 3.84% is around £5700 but they spread this monthly.

As you pay more than £5700/12 you pay off a bit of capital so the next month the interest is a bit lower so the capital bit gets a little bit bigger, repeat each month so the total interest for the year is lower than £5700, do this each year till the last payment is tiny amount of interest and loads of capital.

look at a mortgage caclulater that shows the monthly details
http://www.whatsthecost.com/mortgage.aspx
stick your numbers in then press calculate, then details

lee111s

Interest is usually calculated daily. So every day you have thhe mortgage, the lender adds the interest for that day.

So on day one of your mortgage, you'd have paid about £15.64p per day in interest. This interest is added on to the outstanding balance every day.

This is why overpaying your mortgage can be so beneficia as any overpayments come off the actual mortgage balance as your standard monthly payments will be paying all of the interest, plus a bit of capital.

CLAPTON

orsm wrote: »

Hi,

Could someone please explain the following,

My wife took out a Mortgage and we moved into our home Feb 2014

The mortgage is 3.84% 3 year fixed rate

She got her end of year statement and the following summary

Opening balance as of 01 Jan 2014
Advances £148750
Total Interest £5196.36

Less
Payments received £7683.67 (Feb payment £718.67, then 10 payments of £696.50)

Closing balance as at 31st Dec 2014
£146.262.69

So basically in the whole year only £2487.31 has been paid off the mortgage.

my question is where and how do they get the Total Interest £5196.36 from, is it added on at the start of the Mortgage for the first year. Will there be another chunk of interest added on for this year ?

At the bottom of the statement it states

From Feb 2015 your monthly payment calculated at 3.84% will be
Basic mortgage payment £696.50

Thats the amount we have paid all the way through 2014 too.

Kind regards

Jeff

as an example the first months interest will be

148,750 x 3.84% /12 = 476 interest in the first month very approximately

as you paid 696.5 then the capital will fall to by 220.5 so you will then owe
148,529.5 so the interest for the second month will be based on this reduced sum
and so on

if you search for 'amortisation or loan calculators' you will find lots that show the results month by month

amnblog

If you borrowed £148,750 with no interest and paid it back over 25 years, that would be £5,950 a year.

The reason you are paying about half that back currently is because the interest charge in the early years is relatively high (for 2014 is was £5,116).

Clearly you do not want to be paying £5,950 back in capital plus around £5,000 in interest this year so the mortgage is set up such that you pay more interest and less capital now, and more capital as interest reduces in the later years.

That way your payments are equal over the full term of the loan.


This process is sometimes called amortisation.