Calculating Interest if overpaid

Giggs_11

I'm currently in the process of buying a house.

I am borrowing £82,000 over a 40 year period. I have to pay back nearly £162,000 including interest if it goes the whole 40 year period. (£1.96 per £ it works out to)

I just wanted clarification that for every £1 I OVERPAY, that will knock £1.96 off of interest as well? Or have I understood this wrong?

Example: £80,000 owed, £160,000 inc interest. Overpay £100, takes off this plus further £196 interest = now owe £79,900 or £161,704 left to pay

Clarification would be much appreciated!

ViolaLass

The sooner you overpay, the greater the effect (so no, it won't necessarily knock that amount off what you owe).

Thrugelmir

You'll most likely save far more than that. Interest rates will most certainly rise in a 40 years time frame. Don't expect instant results either. Like rolling a snow ball. Will take time to gather speed.

TrickyDicky101

It will depend when you make the overpayments - £1.96 is for every pound borrowed at the start of the 40 year term.

Giggs_11

I guess what I'm trying to get at is if I was to overpay, does that money go straight towards the 'amount borrowed owed' sum or the 'interest owed' sum?

For example say I'm due to owe £2500 in year 1. Say £1500 of that is interest. If I overpay, will that just be chipping away interest or will that chip at the loan borrowed?

Sorry I can't articulate this very well, I don't know how to word it!

TrickyDicky101

Interest payable is a function of time - at the point you take out the mortgage you don't owe any interest as no time has elapsed.

If you make an overpayment, in most cases it should be deducted from the amount you owe and thus the interest chargeable will be calculated on a smaller balance owing thus resulting in less interest charged to you,

getmore4less

Giggs_11 wrote: »

I guess what I'm trying to get at is if I was to overpay, does that money go straight towards the 'amount borrowed owed' sum or the 'interest owed' sum?

For example say I'm due to owe £2500 in year 1. Say £1500 of that is interest. If I overpay, will that just be chipping away interest or will that chip at the loan borrowed?

Sorry I can't articulate this very well, I don't know how to word it!

The best way to think of it is

Interest get added periodicaly to the amount owing.
This would typicaly be daily or monthly(sometimes accuring daily)

Every payment come off the amount owing.

where the confusion often happens is that the regular payment and interest are done at the same time leaving a bit for capital payment, all extra payments come off capital.


To see the effects of regular payments you can use any simple mortgage calculator that show details.

I use this one, interest only and set payment to see the effect of changes in payment
http://www.whatsthecost.com/mortgage.aspx

you can do just about anything with that with a bit of thought.

Looking at your mortgage.

82k over 40years paying around £162k total

rate of around 3.89%-3.9%

using 3.89% paying off at a rate of £337pm interest is £79900

pay £338pm interest is £79233 and knocks 2 months off the term saving about £1.395 per month in interest.

£347pm(£10 extra) £73745 interest £449 month 31month less.


Oh I nearly forgot,

you can't count your £1 twice, it reduces the capital by £1 and the interest by around the 96p.