Help: Capital and Interest Repayments

smartest_smarty

Hello all,

When taking a standard mortgage, I thought that you repaid the capital and interest payments at the same time.

I've now read that in the first years all you pay is interest and you're not really paying off the capital to start with. Is this true?

If so, basically you're not gaining any equity while only paying off interest.

I also thought as you paid off capital the interest would decrease. Is this true?

I'm now led to believe interest is charged on the full amount borrowed for the life of the loan even if you are making capital repayments. Is this correct?

kingstreet

You pay interest only on what you owe at the time. The payment schedule works out how much you need to pay each month to repay the capital by the end of the term.

In the early years, you pay mostly interest, but as each year passes and the capital starts to fall more quickly, the amount of interest reduces and the amount of capital in each payment increases.

On a 25 year mortgage, you'll probably repay half of it in years 16 - 18 and the other half in years 18 - 25.

Typhoon2000

If you want the capital to go down faster, you can make overpayments on top of your regular payments. This will also mean you mortgage will finish sooner and save you money on the interest.

smartest_smarty

Thanks for your replies.

If this is the case I think i'd make overpayments so the interest falls quicker and the mortgage is repaid sooner.

Are there charges for overpayments?

smartest_smarty

Also, this means if you sell your home in the early years, you basically have lost the equity you would of gained by repaying the capital loan.

That's rubbish

getmore4less

For a given rate debt and term the payment is calculated to be equal each month using amortization.

http://www.whatsthecost.com/mortgage.aspx
will show over the term how much is interest and how much is capital

If the capital payment was spread equaly over the term then the interest would reduce as the debt reduced and the payments would not be equal each month(most people don't want that).

Depends on the interest rate when 1/2 is paid.
eg over 25 years
0.0% 12y 6m
2.5% 14y 5m
5.0% 16y 2m
7.5% 17y 8m
10% 19y 10m

Pixie5740

You need to live somewhere. Either rent a property from a landlord or rent money from the bank. Buying property doesn't really make sense if you only intend to stay there a short while as on top of mortgage interest there are buying and selling estate agency fees, 2 lots of solicitors fees, a survey and stamp duty.

As for whether your mortgage allows you to make penalty free overpayments then you'll need to read the T&C of your mortgage.

elverson

smartest_smarty wrote: »

Thanks for your replies.

If this is the case I think i'd make overpayments so the interest falls quicker and the mortgage is repaid sooner.

Are there charges for overpayments?

Every mortgage is different - there may be an allowance for overpayments eg "10% of the original balance per year" and then a charge for anything above the allowance.

ViolaLass

I don't know where you've been reading prior to this board, but I wouldn't bother reading there again...

Caz3121

smartest_smarty wrote: »

Also, this means if you sell your home in the early years, you basically have lost the equity you would of gained by repaying the capital loan.
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have a look at the guardian loan calculator for a guide (mortgages tend to work the same way)
£200k mortgage for 25 years @ 3% = monthly £948
In month 1 you owe interest on £200k so £500 of your payment goes to interest and £448 goes off the mortgage balance
In month 2 you owe interest on £199, 552 so the interest reduces to £499 and the amount off the balance increases to £449
by month 60, your balance is down to £171k so your payment will be £428 interest and £520 to the balance of the mortgage
by month 240 your balance is £53,600 so the interest on that is down to £134 with £814 coming off the balance

Overpayments will reduce the amount outstanding so in turn reduce the interest on the balance so more of your payment is coming off the capital and ending the mortgage sooner