tryin to understand interest rate calculations

ediblecastle

I've been looking into the basics of mortgages and playing around with online mortgage calculators. Can someone please take me through why a hypothetical mortgage of £10,000 at 10%, over 1 year would be a total repayment of £10,550?

Why isn't it 10% of 10,000 + 10,000?

Cheers,
-Will

(used MSE mortgage calculator and whatsthecost(dot)com/mortgage.aspx)

maginot

If you have a repayment mortgage, you are paying off the capital at the same time as the interest.

Therefore you wouldn't have £1000 interest on a £10000 loan. If interest is calculated monthly, then this would keep reducing every month, as the capital reduced. For example, if you only had £1000 left of capital in the last month, there would only be £100 interest then, obviously this is only 1 month, so APR is over 12 months.

ediblecastle

hmm ok I think i generally get it. capital decreases per month, so interest does too.

but wouldn't your example of taking 10% of the capital every month be extortionate? taking each month at 10% of the capital (capital decreasing by 833 every month (10,000/12) ) you'd be paying back £6500 interest. £16500 total.

So is it more likely that each month, interest is calculated at 10%/12 * remaining capital?

That'd give me a total of around £540, which is quite close to the figure online calculators are giving.

TrickyDicky101

ediblecastle wrote: »

So is it more likely that each month, interest is calculated at 10%/12 * remaining capital?

That'd give me a total of around £540, which is quite close to the figure online calculators are giving.

Yes and that's what maginot said ;-)

ediblecastle

not trying to stir the pot...

but 10% calculated monthly, on £1000 on the last month (mag's example) would generate £8.33 on the last month, not £100. right?

oh well.. I think I get it anyway.

dimbo61

Keep on reading and keep on playing with the online calculator and you will soon realise that paying back a mortgage over 25/30 years even at 3/4/5% will cost you one he'll of a lot of Interest.
You will end up paying nearly Twice the amount you have borrowed.
So Overpay every single month from day one

ViolaLass

TrickyDicky101 wrote: »

Yes and that's what maginot said ;-)

It's not what the last line of maginot's post said.

OP, you've got it right now.

ediblecastle

k cool, thanks for replies.